ANC seeks tax hike to feed spending habits

17 March 2025 - What does the budget mean for economic growth? What’s the current state of manufacturing in South Africa? Why did the US declare the South African ambassador persona non grata? How will the ANC’s and DA’s differing approaches to the US affect the GNU?

ANC seeks tax hike to feed spending habits

Despite much waste, inefficiency and corruption, the government is planning to expand its spending faster than the rate of inflation. Total government expenditure is set to rise by 7.8% in 2025/26, to R2.6 trillion or 32.4% of GDP. Against this, the Treasury is anticipating revenue of R2.2 trillion, or 27.8% of GDP, leaving a deficit of R370.4 billion or 4.6% of GDP that it will have to make up by borrowing money. Those new loans will be added to the debt pile, which will rise to 76.2% of GDP. Debt-service costs will consume 22c of every rand of revenue, more than twice as much as is spent on home affairs, the police, defence, and state security put together.

To increase revenue, the Treasury is increasing personal income tax stealthily, by not adjusting the tax brackets for inflation. It expects this to generate an additional R18 billion in revenue. It will also increase the rate of Value Added Tax (VAT) from 15% to 16% over two years. The first increase, to 15.5%, comes into effect on 1 May 2025 and is expected to generate R13.5 billion in revenue. Parliament will then have 12 months to pass a law authorising the tax increase. If it fails to do so, the increase will fall away. The second increase, to 16%, is scheduled to come into effect on 1 April 2026.

The Treasury did not adjust its economic growth forecasts to reflect the impact of a 0.5pt VAT increase compared to the 2pt increase it proposed originally. It continues to forecast growth at 1.9% in 2025, 1.7% in 2026 and 1.9% in 2027. In our assessment these forecasts are optimistic in the absence of substantive policy reforms.

In the current context of extremely low growth – recorded at 0.6% in 2024 and 0.7% in 2023 – the tax increases are economically questionable and have proved politically contentious. Although the Government of National Unity (GNU) enjoys a comfortable 72% majority in the National Assembly, some GNU member parties oppose the tax increases. Without their support, the government might not have the votes to pass the various pieces of legislation required to enact the budget. CRA clients are receiving a series of client notes that provide more detail and explore the political ramifications of the impasse.

Manufacturing fails to launch

South Africa’s manufacturing sector has not shaken its slump. The ABSA purchasing managers index (PMI) remained below the neutral 50-point mark in February at 44.7, down 0.6 points from January. This is not a blip: it marks four months of decline driven by soft demand and cost pressures. With the sector powering 13% of GDP, this slump will weigh on first-quarter growth.

Business activity dropped from 43.5 in January to 40.6 in February, as production slowed amid soft domestic orders. New sales orders were down from 42 to 38.7. Local logistics choked on port delays, with the supplier deliveries index rising from 49.9 to 55, a sign of longer delivery times. The recent return of loadshedding up to stage 6 is adding to the nervousness.

The manufacturing slump spells trouble beyond the factory floor, as mining sector woes pile onto this risk. The latest GDP data shows a 9.6% drop in Q4:2024 mining capex, with Northam Platinum and Kumba slashing investment by 25% and 9%, respectively. After near-flat growth of 0.3% in 2024, mining’s profit dip – down 1% in 2024 – signals weaker demand for manufactured inputs, with potential to amplify the industrial slump. Since 1990, manufacturing as a share of the economy has almost halved, from 23.7% to 13.0% in 2023.

VW speaks out

Last week Volkswagen (VW) Group Africa chair and managing director Martina Biene highlighted some of the frustrations experienced by local manufacturers doing business in South Africa. She explained that her main competitors in making an investment case for South Africa were 116 other VW plants in other countries. With Volkswagen under pressure from Chinese imports in Europe, Ms Biene warned: “Volkswagen globally will not understand a situation where we don’t have power, and that hinders me in putting forward a strong business case”.

In her remarks Ms Biene focussed on the additional costs VW incurred when manufacturing in South Africa because of unreliable electricity, slow and expensive ports, and deteriorating infrastructure. These costs made VW less competitive compared to importers who were not manufacturing in South Africa, as well as in the export markets. She added that these extra costs required a “political discussion” and said that “sometimes as local manufacturers we don’t feel as valued as we should be.”

Should such a political discussion not achieve material outcomes in lowering production costs, improving infrastructure and ports performance, and addressing other barriers to investment, manufacturing will continue to face headwinds in South Africa.

SA ambassador to the US gets shown the door

South Africa’s ambassador to the US, Ebrahim Rasool, pressed precisely the wrong buttons during a foreign policy webinar last week. He told his audience that US President Donald Trump was “mobilising a supremacy” around “instinctivist, nativist, racist things” and accused Elon Musk and Vice President Vance of exporting this campaign to other parts of the world, like Europe and the UK, via a “dog whistle that is being heard in a global white base”. Mr Rasool’s comments drew the Trump administration’s ire, to the cost of South Africa’s diplomatic and economic interests.

Shortly after Mr Rasool’s comments became public, James Risch, the chairman of the Senate foreign relations committee, accused him of “disgraceful anti-American hate speech” while US Secretary of State Marco Rubio referred to him as “a race-baiting politician who hates America” and declared him persona non grata, giving him a week to leave the country.

The South African government needs to move with speed and care – qualities clearly in short supply in how it is handling matters with the US – to restore some semblance of normality or even respect. The US has a strategic interest in South Africa for its position on an important trade route and on a continent with a fast-growing and young population, as well as its strategic minerals. But America does not feel that it owes South Africa anything, meaning that to restore relations, South Africa must present a strong case on its own merits – rather than reverting to complaints and grievances.

The US stress factor in the GNU

The fraught relationship between South Africa and the US has begun to manifest in domestic political differences. A delegation from the DA recently undertook a trip to the United States in what a spokesperson for the party described as an attempt to “engage with decision-makers in Washington DC to understand what was required to de-escalate and stabilise bilateral relationships”.

Meanwhile, the ANC has signalled its defiance of the US by holding meetings with the Iranian ambassador in the party’s headquarters. The chairwoman of the party’s international affairs subcommittee, Nomvula Mokonyane, termed Iran a friend and emphasised that “your enemies are not necessarily our enemies”. President Ramaphosa has also sent conflicting messages, appending his name to an article harshly critical of Israel and the US posture – while also claiming to want to do an expansive “deal” with Mr Trump.

The apparent differences in approach are emblematic of the sharp divergences in geopolitical outlook between the DA and the ANC. While the DA has typically taken generally pro-Western positions in line with the preferences of most South African voters and prioritised the economic aspects of foreign relationships, the ANC (as a party) has repeatedly made its hostility towards the US plain. The South African state has typically followed a more restrained version of the ANC’s doctrine.

With the ANC and the DA now in government together, these conflicting positions stand to add stresses to the GNU. There have been indications the US administration would be unwilling to deal with the ANC, but might be receptive to other GNU partners. Should the US impose targeted sanctions on individual ANC leaders and institutions, as recommended by the influential Hudson Institute, this would exacerbate tensions in the GNU.