On Wednesday, after a delay, Minister of Finance Enoch Godongwana revealed the budget proposal for 2025 and it’s not good news.

The headline is that the government needs more money, and to get that money it intends to raise the VAT rate by 0.5 percent in May this year and by another 0.5 percent in April 2026. This means that by April 2026, South Africans will be paying 16 percent VAT on all goods save a few VAT-exempt items.

This increase is justified, says Godongwana, as government needs to raise the funds needed to fulfil its service delivery mandate in the health, education, transport and security sectors.

All told, this increase is expected to raise R28 billion this year and R14.5 billion in 2026 and 2027.

If you spotted that the projected income lowers once the VAT reaches 16 percent, you aren’t alone. This suggests that once the tax on goods and services reaches 16 percent, there will be a lot less spending happening in South Africa, lowering the potential revenue the government will collect.

And this is bad news for small businesses which have been feeling the pinch of a strained economy for some time now.

Lula, a local company that provides funding to South African SMEs, has published a whitepaper today that takes a look at how bad things are for SMEs in South Africa. The short of it is that despite being responsible for a 40 percent contribution to GDP, the private sector is largely ignored by government when it comes to matters of policy.

Speaking at an online presentation this morning, chief risk officer for Lula, Garth Rossiter highlighted just how bad the landscape is for South African business owners.

“It was disappointing to note that there was not one single mention of small business or SMEs in the Minister’s speech. The plan to increase the VAT rate will also hurt small businesses, albeit it is positive to see that the planned rate of increase was lower than earlier planned,” the CRO noted.

As it stands, all private sector businesses are struggling to get paid. It takes a large corporation at least 50 days to get a payment, which isn’t ideal, but if the business is large enough it may be able to weather that storm. However, for SMEs the situation is more dire. On average it takes an SME 70 days to get paid, which, for those keeping score, is a little over two billing cycles. This means that if an SME depends on a payment, it may default on its debt obligations two months in a row, incurring penalties while they wait, before they can make a payment.

Indeed, Lula notes that it has seen a rise in the number of defaults from SMEs. While the South African Reserve Bank initiated rate cuts in 2024, that doesn’t help SMEs who were already burdened with high borrowing costs. This, coupled with the need to slash prices given a lowering inflation rate, has left business owners in the mother of all lurches.

This in turn leads to job losses as SMEs simply can’t afford to employ people given the rising number of bills and dwindling customer base. For those who are lucky enough to enjoy gainful employment, their salary isn’t doing much anymore and raises are rare.

Slap in the face

While the private sector starts counting beans and making choices even Hobson wouldn’t envy, the government intends to use tax money to give public sector officials increases.

During his speech, Godongwana noted that the three-year wage agreement the government reached with its employees “exceeds the 2024 Budget and MTBPS[Medium Term Budget Policy Statement] projections”. And yet, the government still agreed to the increase that will cost a total of R23.3 billion between 2025 and 2028.

Again, the VAT increase is only expected to bring in R42.5 billion over the next two years, meaning the lion’s share of that revenue is being used to cash the cheque government should never have written to begin with.

“It is a smack in the face for small business owners who make up the biggest employer segment in the country. They are forced to make job cuts to keep the doors open while public sector wages are increased. This is hard to stomach and particularly tone-deaf,” said Rossiter.

But there is another slap that is yet to land.

With the VAT increase consumers are bound to spend less. While there is no inflation of personal income tax on the cards, there was also no mention of a decrease in the personal income tax rate, which means that taxpayers will still be required to make their contribution while paying more for goods and services at the till.

One good thing we feel should be highlighted is that the government has said it will be spending money on improving infrastructure, which means that the SMEs that do weather the storm are likely to enjoy an improved energy sector, streamlined ports and roads that work properly. At least, we hope they will.

How bad is the storm really?

In short – very bad.

According to the government’s figures, there are as many as 3.5 million SMEs in South Africa. That suggests that many South Africans rely on SMEs for a pay cheque.

However, if VAT is increased, consumers may be discouraged from spending money at small businesses as bigger stores may offer discounts that SMEs can’t compete with. This means that these SMEs have a lower turnover, which means they may have to let staff go, contributing to the unemployment figures.

In the worst case scenario, the business has to shutter, leading to more job losses and ultimately, a contributor to South Africa’s gross domestic product is lost.

Meanwhile, because jobs are being lost, the amount folks spend declines and so too does the amount government can collect from VAT.

But at least the public sector is getting its increase right?

We’re not saying that those in the public sector shouldn’t get an increase, however, it’s yet to be revealed which public sector employees are getting an increase. We’re sure most South Africans would be okay with the salaries of teachers and medical professionals being increased. However, if these increases are only directed at the elite, that isn’t going to go down well in the court of public opinion.

“The past year has been one of survival for many South African SMEs. Economic stagnation, high interest rates, and declining consumer spending have created an unforgiving business landscape. Yet with resilience and strategic financial management, SMEs can position themselves for recovery and future success,” says Rossiter.

While the CRO has a rosier outlook, we’re concerned.

There appears to be no respite for businesses or consumers on the horizon. All this while foreign governments take a hatchet to our social fabric and our leaders sit by, waiting for their tenure to pass.

We can’t help but feel like a levy is about to break, and with it, a flood of problems being washed to the feet of government.

[Image – Pete Linforth from Pixabay]