Any increase in Value-Added Tax (VAT) in South Africa will place an overwhelming burden on household spending, reduce disposable income, and curtail consumer confidence.
This is the view of Naamsa The Automotive Business Council, which commented on the 0.5 percentage point VAT hike announced this March in Finance Minister Enoch Godongwana’s annual Budget Policy Statement.
Due to “several persistent spending pressures in health, education, transport, and security,” Godongwana said Treasury has decided to raise VAT by 0.5 percentage points in 2025/26 and another 0.5 the year thereafter to reach a 16% VAT rate by the end of the 2026/27 financial year.
“This decision comes at a time when households are already struggling under the weight of rising energy costs, elevated debt levels, and slow wage growth,” said Naamsa.
“The government has opted for fiscal consolidation at a time when counter-cyclical measures are needed to support economic recovery.”
The Council explains that raising VAT in a period of weak consumer spending is inherently contractionary, as it dampens aggregate demand at a time when household consumption accounts for over 60% of South Africa’s GDP.
Additionally, it stands to counteract the expected positive influence of three consecutive interest rate cuts by the South African Reserve Bank (SARB).
“This policy choice could inadvertently reinforce stagnation, trapping the economy in a low-growth cycle,” said Naamsa.
Rising running costs
Transport expenses are a significant part of household budgets, accounting for an average of 14% of total consumer expenditure.
It’s expected that the VAT increase will further drive up vehicle prices, fuel costs, public transport fares, and maintenance expenses, worsening affordability constraints.
“This regressive tax measure will disproportionately affect lower-income households, forcing them to divert spending from essential goods and services, further reducing overall consumer demand,” said Naamsa.
Downward pressure on sales and production
For the automotive industry at large, these new policy measures will lead to higher vehicle prices and, in turn, suppressed vehicle demand in both the new and used sectors.
Consequently dealerships will witness fewer sales and production volumes at the country’s numerous vehicle factories will take a dive.
On top of this, export competitiveness will suffer as local production faces cost pressures and falling domestic demand reduces economies of scale.
“The misalignment between monetary policy easing [interest rate cuts] and fiscal tightening [higher VAT and energy costs] will neutralize any intended stimulus, leaving households and businesses constrained by affordability pressures,” said Naamsa.
There’s a better way
The government’s debt-reduction strategy aims to lower debt servicing costs by 5% over five years, but the feasibility of this goal is contingent on optimistic assumptions.
Mainly, authorities project stronger-than-expected GDP growth over the next five years, higher tax compliance by the nation’s populace, and higher public sector expenditure discipline.
Naamsa highlights that, historically, these three areas have been challenging for South Africa.
“If these assumptions do not materialize, the VAT hike may fail to deliver its intended fiscal benefits, leading to continued borrowing and an even higher debt burden,” said Naamsa.
Rather than relying solely on VAT increases to boost revenue, government should consider a broader strategy, said Naamsa.
It proposed the following:
- Reducing wasteful spending
- Expanding the tax base through economic growth, rather than higher tax rates
- Ensuring that the R1-trillion infrastructure commitment over three years translates into actual economic productivity gains
- Greater policy alignment between fiscal and monetary measures, ensuring that efforts to stimulate economic growth are not undone by misaligned tax policies
“The 2025 Budget Speech reflects a government prioritizing revenue generation through taxation while failing to create the conditions for long-term economic expansion,” said Naamsa.
Increasing VAT in a fragile consumer environment undermines household spending, reduces business condence, and neutralizes the positive effects of monetary stimulus.
“The misalignment between fiscal tightening and monetary easing is particularly concerning,” said Naamsa.
“While the SARB has lowered interest rates to support consumer and business lending, higher taxation, rising fuel costs, and energy price hikes will erode these gains.”
As a result, households will not experience the expected relief from lower borrowing costs, and key industrial sectors like automotive manufacturing will face subdued demand.
“Naamsa urges policymakers to reconsider the VAT increase timeline, introduce targeted tax relief, enhance energy security, and align fiscal and monetary policies,” the Council concluded.
“If these concerns are not addressed, the sector faces a prolonged downturn, investment flight, and job losses – weakening one of South Africa’s most critical industries.”
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