While the confirmation of an increase of half a percentage point in value-added tax (VAT) has disappointed tourism stakeholders, the 2025 Budget Speech’s emphasis on infrastructure development has provided cause for optimism.
Delivering the speech on March 12, Finance Minister Enoch Godongwana said that public infrastructure spending over the next three years would amount to more than R1 trillion (€50bn), with 77% of this allocated to transport and logistics, energy, and water and sanitation.
FEDHASA Chairperson Rosemary Anderson said that appropriate use of the funding would address the service delivery constraints plaguing hospitality businesses.
“The hospitality industry has battled to contend with the effects of service delivery challenges such as unreliable water supply and, in particular, the inability of municipalities to operate compliant wastewater treatment works. If the money is spent on what it should be spent on, then we hope to see major improvements in service delivery and in the towns and spaces that tourists are welcomed into.”
Rhino Africa CEO David Ryan described functional infrastructure as a central component of a thriving tourism environment.
“Tourism is strongly concentrated in areas where infrastructure works. Well-maintained roads and buildings are central to providing a pleasing guest experience. We’ve seen the detrimental impacts of crumbling road infrastructure on tourism to areas such as the Blyde River Canyon or Dullstroom in Mpumalanga,” said Ryan.
Smaller VAT hike still has impacts
Initially scheduled for February 19, the 2025 Budget Speech was postponed due to disputes between the political parties in the Government of National Unity over a proposed VAT hike of two percentage points.
The compromise reached, to increase VAT by half a percentage point during each of the 2025/26 and 2026/27 financial years, bringing total VAT to 16%, was still a blow for the hospitality industry, said Anderson.
“The hospitality sector is a major contributor to South Africa’s economy, but it remains highly price-sensitive, with operating margins already under major pressure thanks to escalating input costs, including electricity, food inflation, labour costs and the like. Smaller independent restaurants and guesthouses – often at the very heart of authentic South African tourism experiences – are going to bear the brunt of this increase as they already operate on razor-thin margins.”
She said the VAT increase would also raise prices for tourists.
“It will translate into increased prices for accommodation, dining out, and other tourism-related activities – making South Africa a more expensive destination for both domestic and international travellers.”
The VAT increases are expected to raise an additional R42 bn (€2.1bn) in revenue for the country.
Godongwana said that government had had to carefully weigh the impacts of the increases against the urgency of addressing service delivery issues.
“We are aware of the fact that a lower overall burden of tax can help to increase investment and job creation and also unlock household spending power. We have, however, had to balance this knowledge against the very real, and pressing, service delivery needs that are vital to our developmental goals and which cannot be further postponed,” said Godongwana.
He explained that amongst other options such as personal income or corporate tax increases and taking on additional debt, the VAT hike was “the most effective way to avoid further spending cuts” and enable the extension of social grants.
Godongwana said that revenue generated through the tax measures would be spent on infrastructure investments, social protection, a “higher than anticipated” public-service wage agreement, and provisional allocations for critical frontline services.
