The alcohol industry is a cornerstone of South Africa’s economy. According to a recent study by the Drinks Federation of South Africa (DF-SA), the sector contributed R226.3 billion to South Africa’s GDP in 2022 – approximately 3.6% of GDP. The industry has a large ecosystem encompassing farming, manufacturing, distribution, and hospitality. As a result, the industry’s ripple effect extends beyond direct contributions. Every R1 million in alcohol-related GDP contribution generates an additional R1.3 million elsewhere in the economy, supporting approximately 500,000 jobs and impacting over 1.15 million livelihoods. The total value chain for the industry, referred to as “seed to sip”, contributes both upstream and downstream. Upstream activities consist of farming which benefit rural communities through the cultivation of barley, grapes, and hops. Whilst downstream activities benefit sectors like bottling, packaging, distribution, and retail, with alcohol finding its way into taverns, bars, and restaurants.
South Africa's illicit alcohol market has experienced significant growth, a trend that accelerated during the COVID-19 pandemic due to alcohol bans. Toxic homebrews pose severe health risks to individuals who consume them. The Transnational Alliance to Combat Illicit Trade (TRACIT) has raised alarm over the escalating issue of illicit trade, calling for enhanced regulation and stricter enforcement measures to mitigate its economic impact and address associated health risks. The illicit alcohol market – counterfeit, smuggled or unregulated products – is estimated at 14-22% of South Africa’s total alcohol market. Neighbouring nations like Mozambique and Zambia face even higher levels of illicit trade, emphasising the regional challenge. Illicit alcohol trade has also resulted in substantial tax revenue losses for government.
Last year's challenging market environment – characterised by high interest rates, persistent inflation, soaring fuel prices, and rising unemployment – led to constrained consumer spending. However, a modest recovery appears to be underway, fuelled by falling interest rates and lower fuel costs, bringing a sense of cautious optimism. Despite these signs of improvement, the industry still grapples with significant challenges. The excise tax system continues to impose a heavy burden. In the 2024 Budget Speech, National Treasury announced above-inflation increases in “sin taxes” of between 6.7% and 7.2% for 2024/2025. As a result, the Beer Association of South Africa (BASA) has urged the government to lessen its dependence on excise tax revenue and to explore solutions that mitigate the impact on both small and large industry players. The recent excise tax led to a 14 cents rise per beer can, 28 cents per bottle of wine, and R5.53 per bottle of spirits.
Over the past decade, beer prices have doubled, driven by escalating costs and taxes, while consumption has increased by only 0.8% a year on average from 2012/13 to 2023/24. For industry players, these price increases are becoming increasingly unsustainable as demand remains sluggish. Economic constraints on consumers, combined with social changes among younger generations who are increasingly health-conscious and less interested in heavy drinking, have contributed to weak alcohol consumption growth. Excessive taxation poses a threat to the industry, impacting job creation, economic growth, and revenue generation. Moreover, high alcohol costs may push consumers further toward illicit products, raising health risks. In taverns, where beer accounts for 30% of sales, even a R1 price hike can notably dampen demand, especially among social drinkers. If beer becomes unaffordable, shifts in consumer behaviour could jeopardise thousands of small businesses.
Alcohol tax policies differ significantly between developed and developing markets. Developed markets, such as the European Union (EU) and the United States, impose higher alcohol taxes, mainly driven by health and regulatory considerations. However, these taxes account for a relatively small share of GDP. On the contrary, developing countries may have lower alcohol tax rates, but the revenue collected often constitutes a larger share of GDP, reflecting greater economic reliance on the sector. In 2022, South Africa's alcohol sector contributed R96.9 billion in tax revenue, accounting for 6.7% of the country's total tax income. This substantial figure highlights the government’s reliance on the industry to finance critical infrastructure and essential public services. Whilst emerging market peers experience a notable economic impact from alcohol taxation, South Africa’s reliance on this industry remains particularly high.
In early November 2024, National Treasury published its latest policy review on the taxation of alcoholic beverages where they have proposed setting a minimum price for alcoholic beverages to reduce harmful consumption which is a drain on the country’s health resources. However, the beer, wine, and spirits industries have expressed strong opposition to the 30-day period allocated for public commentary, arguing that it is insufficient for a thorough response to the policy document. Typically, the government allows 60 days for public consultations, making the shortened timeframe a contentious issue. In response to numerous requests for an extension, National Treasury extended the deadline for feedback on this discussion paper from 13 December 2024 to 14 February 2025.
Given the alcohol industry's significant role in the economy, it is essential to adopt a balanced approach when considering alcohol taxation. The Laffer Curve, widely used in economics, illustrates that beyond a certain point, increasing tax rates can actually reduce total tax revenue by stifling the legal market and incentivising tax evasion or the use of illicit goods.
While higher excise taxes can address health risks and raise public revenue, Government must also consider the industry's contribution to employment and GDP. Overly aggressive tax hikes could harm local businesses and informal sectors, leading to unintended consequences like increased illicit trade and job losses. Strengthening enforcement and supporting the legal industry are crucial to protecting South Africa's economic and public health interests.