The REAL cost if May 2025 VAT increases go ahead
As the DA and EFF interdict May 2025 VAT increases in the Western Cape High Court, economists have revealed the long-term cost of these measures. Latest research from the National Agricultural Marketing Council (NAMC) points to the negative impact May 2025 VAT increases will have on the South Africa economy.
Should May 2025 VAT increases go ahead, it could cause long-term damage to the economy. This includes killing jobs and reducing overall government revenue, not increasing it. According to NAMC's modelling, not only will May 2025 VAT increases bring in less money than expected, but over time it will have negative secondary effects on various industries.
As such, NAMC estimates real GDP will fall by 0.21 percentage points and significantly reduce household spending. Next, while VAT collection will increase, other forms of tax revenue collection will likely fall due to lower disposable income. In turn, this will lower Personal Income Tax (PIT) collections, something NAMC calls the 'general equilibrium effect.'
Therefore, if May 2025 VAT increases go ahead, higher income expenditure elasticities are bound to be hardest hit. These include vehicles, electronics, other household luxury consumables and real estate transactions subject to VAT. Basically, the National Treasury can't have its cake and eat it, too …
The Finance Minister has also increased excise on alcohol and tobacco products – the so-called 'sin tax.' But here, too, any short-term increase in revenue collection jeopardises long-term prospects of the industry. A 6.8% increase in excise duties on alcohol is expected to have ripple effects across the wine and brandy industries.
NAMC estimates an additional R1 billion in revenue will be offset by losses due to lower economic activity and disposable income. 'Our simulation suggests that for every R1-billion increase in excise duties collected due to higher tax rates, other tax revenue collected may fall by around R0.25 billion,' says NAMC.
Therefore, at an industry level, the excise duty increase could result in the beverage industry's sales falling by 0.3%. South Africa's beverage industry contributed 3.6% (R226.3 billion) to South Africa's GDP. And the industry employs approximately 500 000 people.
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