Budget: Why a VAT increase is the least bad option

South Africa is once again faced with a difficult fiscal decision, and once again, the country is leaning toward magical solutions over sustainable ones. As political pressure mounts to reverse the proposed 0.5% VAT hike, the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) has re-entered public debate. 

Many are calling for the government to dip into this reserve to avoid raising taxes. But that would be a mistake. The GFECRA is not the solution to our fiscal problems. A VAT increase, while deeply unpopular, is the least damaging and most responsible option available right now.

The GFECRA is a valuation account in the South African Reserve Bank that records the gains and losses on the country’s gold and foreign exchange reserves as a result of currency fluctuations. When the rand depreciates, those foreign reserves are worth more in rand terms, resulting in a gain. When the rand strengthens, a loss is recorded. Crucially, the GFECRA is not a pool of liquid cash. It is not a piggy bank.

Settling a portion of the GFECRA balance essentially realising some of those gains requires agreement between the Reserve Bank governor and the minister of finance. In 2024, a R250 billion settlement was agreed upon, with a portion transferred to the treasury. That helped manage debt and reduce borrowing costs. But the scale of that intervention cannot be repeated without undermining the Reserve Bank’s financial integrity.

To use the GFECRA again, the Reserve Bank would have to reduce its buffer against future losses. That is risky in a volatile global environment, and would send the wrong signal to markets about South Africa’s commitment to prudent monetary policy and institutional independence. The GFECRA must remain a contingency buffer not a fiscal tool of convenience.

The uncomfortable truth is that the government has only three options for increasing cash flow.

It can cut spending, which is already politically treacherous and threatens critical public services. 

It can borrow more, which is fiscally reckless when South Africa is spending more than R382 billion a year just servicing existing debt more than it spends on health or policing. 

Or it can raise taxes. 

Of these three, raising VAT though unpalatable is the least damaging and the most effective in the short term. It is broad-based, difficult to evade, and comparatively easy to administer. While no option is painless, this is the only one that doesn’t compromise the country’s long-term fiscal stability.

Yes, VAT is regressive. Yes, it affects the poor. But South Africa has an extensive list of zero-rated basic foodstuffs such as brown bread, maize meal and vegetables that shield the poor from the worst effects of a VAT increase. Moreover, targeted social grants and pro-poor spending can help offset the effect.

Unlike income tax or corporate tax, VAT is hard to avoid and offers a reliable stream of revenue. And in the short term, reliability matters. The proposed 0.5% increase, combined with bracket creep, is estimated to raise R31.5 billion. That will keep the budget intact and support debt stabilisation.

Delaying or scrapping this increase in favour of a politically expedient raid on the GFECRA would be short-sighted. Worse, it would send a dangerous message: that South Africa is unwilling to make difficult fiscal decisions and would rather erode the Reserve Bank’s independence.

This is not to say a VAT hike is a good solution. It isn’t. But it is a necessary one, given the context. The real challenge is to grow the economy, broaden the tax base and reform our public finances in a sustainable way. That work cannot begin if we start by hollowing out institutional safeguards or avoiding hard choices. 

Using the GFECRA might feel like a clever escape. But it is not a long-term answer. The VAT increase, unpopular as it may be, is the honest path and honesty, in fiscal terms, is what South Africa needs most right now.

Tara Roos is a policy writer, researcher and political analyst.