Professor Daniel Meyer is economic development specialist and policy analyst, School of Public Management, Governance and Public Policy, College of Business and Economics, University of Johannesburg.
He recently published an opinion article that first appeared in the Daily Maverick on 10 March 2025
In the 2023 tax year, around 7.6 million individuals filed tax returns, yet only 1.66 million earned more than R500,000 annually, which contributed 76.2% of all personal income tax. The top 4% of assessed taxpayers accounted for 52.7% of total tax revenue.
he 2013 World Economic Forum Report on the future of government advocates for a streamlined (lean and mean) and efficient administration that selects only the most competent individuals, a compact and efficient government.
This principle starkly contrasts with the South African government, which has expanded significantly in workforce and expenditure over the past few decades. A smaller and more focused government would be more effective.
However, in his unsuccessful attempt to present the 2025/2026 budget speech, Minister of Finance Enoch Godongwana sought to increase government spending further. His plan to raise taxes ignores the real issue – rather than generating more revenue, the focus should be on reducing expenses and ensuring more efficient use of funds. Taxpayers see little return on their contributions and are unwilling to pay more, ultimately draining the economy.
South Africa’s fiscal landscape is marked by a shrinking tax base and rising spending pressures. Government expenditure on debt repayments and social welfare grants has spiralled out of control, raising concerns about the long-term sustainability of public finances.
The national debt-to-GDP ratio has climbed to 75%, reaching a critical threshold where further borrowing is unsustainable. South Africa’s tax system disproportionately depends on a small group of high-income earners.
At the same time, the number of social grant beneficiaries has risen significantly to more than 28 million over the past two decades. This imbalance threatens the government’s financial stability.
In the 2023 tax year, around 7.6 million individuals filed tax returns, yet only 1.66 million earned more than R500,000 annually, which contributed 76.2% of all personal income tax.
Moreover, the top 4% of assessed taxpayers accounted for 52.7% of total tax revenue. This heavy reliance on a limited number of high earners is a critical weakness, as many can relocate, potentially further depleting the tax base.
The recent budget speech cancellation highlighted the government’s escalating fiscal deficit and the pressing need to secure additional revenue. The minister of finance signalled a preference for increasing VAT over personal income tax, acknowledging that individuals are already heavily taxed, per the Laffer curve’s principles.
However, available data suggests that instead of imposing higher taxes, the government should prioritise reducing expenditures, enhancing efficiency, minimising waste and tackling corruption to improve financial sustainability.
Types of taxes and contributions
Personal Income Tax (PIT) is a major contributor to South Africa’s tax revenue, accounting for about 43.8% of total tax income. In the 2023/24 fiscal year, assessed taxpayers reported a combined taxable income of R2.3-trillion, resulting in a tax liability of R499.9-billion and an average tax rate of 21.3%.
Corporate Income Tax (CIT) makes up 21.3% of total tax revenue, with fluctuating collections based on the performance of key sectors like mining.
In the 2023/24 fiscal year, of the 1,166,692 companies assessed for the 2022 tax year, only 20.7% reported positive taxable income. A significant portion of CIT revenue came from 549 large companies – each with taxable income exceeding R200-million – collectively accounting for 66.5% of assessed CIT.
Value-Added Tax (VAT) remains a vital component of the tax system, contributing about 30.1% of total tax revenue. In the 2023/24 fiscal year, there were 488,118 active VAT vendors, with companies and close corporations making up 80.9%. These entities were responsible for 93.2% of domestic VAT payments.
The minister of finance withdrew the 2025/2026 budget on 20 February 2025 and the speech contained a VAT hike of two percentage points. The implications of the decision are: additional tax collection of R50- to R60-billion to assist in reducing the budget revenue deficit; increase the already high cost of living for all, especially the poor section of the population, as prices of most goods and services will increase by at least two percentage points; a reduction of 1.0% to 1.5% in consumer spending leading to a 0.6% reduction in economic growth; and inflation could rise by 1% which will effectively stop the current down cycle in interest rate cuts by the SARB, subduing any chances of faster growth.
The Budget will now be presented on Wednesday, 12 March 2025, and the nation will hold its breath.
Challenges for the tax base
South Africa’s tax base is under severe pressure due to sluggish economic growth, high unemployment and the ongoing emigration of skilled professionals, reducing the number of taxpayers and jeopardising fiscal stability.
The economy has endured weak growth for more than a decade, with GDP expected to rise by just 1.1% in 2024, limiting job opportunities and shrinking personal income tax revenues.
The situation is worsened by emigration, as more than 32,000 individuals ceased tax residency between 2017 and 2021, including 2,700 earning more than R500,000 annually. In 2024 alone, 38,000 taxpayers left the country, leading to an estimated R3-billion loss in tax revenue.
The BRICS Wealth Report (2024) revealed a 20% decline in millionaires from 2013 to 2023, with 9,350 high-net-worth individuals departing over the decade.
On the spending side, rising social grants present a significant fiscal challenge, increasing from R250.97-billion in 2023/24 to R266.21-billion (16.3% of the Budget) in 2024/25.
Debt service costs have also surged to R382-billion (16.1% of the Budget), with no signs of slowing down. Meanwhile, national government spending climbed 6.1% to R2.04-trillion in 2022/23, with more than half directed toward provincial and local governments.
With a tax-to-GDP ratio of 27.1% – substantially higher than the 16% average across 36 African nations – South Africa depends on a narrow taxpayer base to sustain its expanding social commitments. This imbalance is unsustainable, underscoring the urgent need for policies that drive economic growth, foster job creation and retain skilled professionals.
Policy recommendations:
Expanding the tax base: Introduce policies that drive economic growth and generate employment opportunities, thereby increasing the number of taxpayers. Encouraging entrepreneurship and supporting small and medium-sized enterprises (SMEs) can help diversify and expand the tax base.
Improving tax compliance: Strengthen enforcement measures to combat tax evasion and enhance overall compliance. Technology and data analytics can help identify non-compliant taxpayers and ensure accurate tax reporting. An adequate SARS investment could lead to an additional R50-billion in tax revenue annually.
Reassessing social grant policies: While social grants play a crucial role in poverty alleviation, their long-term sustainability must be carefully evaluated. Initiatives to foster self-reliance and reduce dependency on grants can help ease financial strain on the government.
Enhancing public spending efficiency: Conduct comprehensive audits to identify and eliminate wasteful government expenditures. Ensuring that public funds are effectively allocated and utilised can free up resources for essential services without increasing the tax burden. Implementing a zero-based budgeting approach would help achieve this.
Promoting economic growth and diversification: Reduce reliance on a few key industries by fostering growth in the technology, manufacturing and agriculture sectors. A more diversified economy would lead to a broader and more sustainable tax revenue stream.
Curbing wasteful spending and corruption: According to the Auditor-General’s 2023 report, more than R50-billion is lost annually due to corruption and financial mismanagement. Stronger anti-corruption measures must be implemented to prevent this leakage.
Addressing inefficiencies in state-owned enterprises (SOEs): Stop ineffective and non-productive spending by underperforming SOEs such as Eskom, Transnet, and the SABC to prevent further financial strain on public resources.
Retaining skilled professionals and high-income earners: Introduce tax incentives and relief measures to discourage high-income earners from emigrating. Enhancing service delivery, infrastructure and economic opportunities will make South Africa a more attractive place to live and work, helping to stabilise the tax base.
Conclusion
South Africa stands at a fiscal crossroads, with a narrowing tax base and escalating social grant commitments challenging the sustainability of public finances. Addressing this issue requires a multifaceted approach that broadens the tax base, enhances compliance, reassesses social welfare policies, improves public expenditure efficiency and fosters economic diversification. Proactive and comprehensive policy measures are imperative to ensure the nation’s fiscal health and the wellbeing of its citizens.
*The views expressed in this article are that of the author/s and do not necessarily reflect that of the University of Johannesburg.
