Bacchus MindEconomy Chronicle

When South Africa’s Finance Minister Enoch Godongwana formally withdrew the proposed VAT hike earlier this year, many South Africans felt a sense of relief. With living costs climbing and economic growth stagnating, the idea of paying more at the till was understandably unpopular. Scrapping the 0.5 percentage point VAT increase spares households some pain—but it also leaves Treasury with a R75 billion hole (over the next three fiscal years) to fill and subsequently a much tougher budget balancing act.

This marks the third attempt at finalising the 2025 fiscal framework, and the stakes are high. The cancellation of the VAT hike, while welcome to consumers, removes a key revenue lever that had already been baked into the original budget. The challenge now is to rework the numbers—without undermining support for vulnerable households or further degrading already-stretched public services.

It’s a hard ask. Treasury was already walking a fiscal tightrope. Yes, bracket creep from personal income tax (the hidden tax increase where inflation pushes taxpayers into higher brackets) is expected to generate around R18 billion. But that won’t fully offset the revenue lost from the VAT reversal. Now, with growth prospects dimming- driven by both global headwinds and mounting uncertainty around the stability of South Africa’s Government of National Unity (GNU)- Treasury faces the added challenge of downgrading its growth and revenue expectations. Back in February, National Treasury projected real GDP growth of 1.9% for 2025. But that optimism hasn’t aged well. The IMF now expects just 1% growth- a sobering drop. When every cent counts, every basis point of growth is crucial.

The Price of Policy Uncertainty: A Growing Threat to Economic Stability

Beyond the numbers, this whole episode highlights a persistent and costly issue: policy uncertainty. The VAT hike wasn’t just a market rumour or media conjecture- it was part of the formal budget, announced publicly, and planned for across government and industry. Its sudden reversal forced businesses to undo system changes, pricing strategies, and customer communications- at real operational cost.

Unpredictable policy reversals shake business confidence. They complicate investment decisions, delay hiring, and weaken the state’s fiscal credibility. For investors (particularly in the bond market) what matters now is not just the size of the deficit, but whether government can credibly commit to a plan and stick to it.

While the reversal of the VAT hike may have brought short-term relief to consumers, it also laid bare a more systemic risk: South Africa’s increasingly fragile policy environment. The fiscal U-turn is just the latest in a series of abrupt, often poorly signalled shifts in economic policy- each one further corroding confidence, both at home and abroad.

At its core, policy uncertainty is a tax on the economy. It slows investment, raises borrowing costs, discourages hiring, and undermines the long-term planning necessary for sustained growth. And while it may not appear on the government’s balance sheet, its effects are pervasive- materialising in stagnant job creation, capital flight, weakened state capacity, and eroded public trust.

Investment Paralysis and Capital Flight

Business investment depends on predictability. Firms- particularly in capital-intensive sectors like manufacturing, mining, and infrastructure- make long-term decisions based on their expectations of future policy, tax rates, regulation, and demand conditions. When those assumptions shift suddenly, as they did with the VAT reversal, it forces a costly reappraisal.

In the case of the VAT proposal, businesses had already begun preparing for its implementation: adjusting pricing models, updating software systems, printing new marketing materials, and engaging supply chain partners. The reversal forced them to redo all of this- wasting both time and money. Worse, it signalled that even formally announced fiscal measures are subject to political retraction.

Multinational firms, in particular, view such reversals as red flags. Foreign direct investment in South Africa has already been lagging due to load shedding, rail and port backlogs, and deteriorating infrastructure. Add policy inconsistency to the list, and investors simply look elsewhere—to jurisdictions where governments follow through on what they announce.

Elevated Borrowing Costs and Market Scepticism

Policy credibility is also central to how financial markets price risk. When bond investors sense that fiscal targets may not be met, or that political pressures will override economic logic, they demand higher yields to compensate. The recent bond market reaction to fiscal uncertainty in South Africa is a case in point: yields on longer-dated government bonds rose as credibility eroded, driving up the cost of servicing debt.

South Africa already spends c.R389 billion annually on interest payments—more than it allocates to higher education, policing, or housing. That means that for every rand that is raised in revenue, 22 cents is paid to over to service the cost of debt. That’s money that could otherwise be spent on rebuilding infrastructure, expanding social protection, or improving public services.

Markets don’t expect perfection- but they do expect consistency. Sudden reversals, uncoordinated policy messaging, and vague fiscal commitments feed into a negative feedback loop: less trust leads to higher borrowing costs, which in turn tightens fiscal space, forcing even more abrupt adjustments.

Erosion of Public Trust and Social Cohesion

It’s not only investors who are watching. Citizens notice policy flip-flops too- and the consequences can be profound. Many South Africans, especially those in vulnerable communities, live in a constant state of economic insecurity. When social policies are changed on short notice, or when promised support (like higher social grants or new food subsidies) is withdrawn, it feeds disillusionment and weakens the social contract.

In the case of the now-reversed VAT hike, Treasury had also planned compensatory measures to shield the poor- such as increases in social grants and additional zero-rated food items. These have also been quietly shelved. The message, rightly or wrongly, is that government promises can no longer be relied upon. That perception undermines not just fiscal policy- it erodes faith in institutions themselves.

Over time, this disaffection can lead to more than just voter apathy. It contributes to rising protest activity, declining tax morale (as more citizens question why they should comply), and a growing disconnect between citizens and the state. In a society already grappling with deep inequality and youth unemployment above 60%, policy uncertainty becomes a multiplier of social fragility.

Chilling Effect on Reform and Institutional Capacity

Perhaps the most insidious impact of policy volatility is that it makes long-term reform almost impossible. Public sector institutions need clarity and stability to plan and execute meaningful change. Departments that draft new regulations, procure large projects, or implement social programs rely on consistent direction from Treasury and Cabinet.

But when policy direction changes midstream- whether due to shifting political alliances, misaligned messaging between departments, or changes in budgetary decisions- reform grinds to a halt. Skilled professionals lose motivation. Programmes stall. Pilot projects are abandoned. And institutional memory suffers as talent exits the public service.

The Broader Cost to Growth and National Development

The cumulative effect of all this is a drag on economic growth that is both measurable and preventable. The IMF, World Bank, and numerous rating agencies have repeatedly cited policy uncertainty as a key reason for South Africa’s underperformance. Treasury itself acknowledged that the VAT reversal, while easing household pressures in the short term, will lower its real GDP growth for 2025. In short, policy uncertainty doesn’t just affect this year’s budget—it mortgages the country’s future.

A Call for Policy Stability and Institutional Courage

The lesson is clear: policy must be made with care—and kept with courage. Transparency, consistency, and coherence are not luxuries in economic policymaking; they are prerequisites for progress. South Africa’s fiscal future does not depend solely on whether VAT is raised or not. It depends on whether government can commit to a path, explain its trade-offs clearly, and stick to its plans– even when it’s politically inconvenient.

The country is at a crossroads. It can either continue down a road of ad hoc adjustments and reactive decision-making—or seize this moment to restore credibility, rebuild trust, and chart a more stable and inclusive growth path. If there’s one thing the economy fears more than bad news, it’s uncertainty about what comes next.