South Africa in serious financial trouble

The Finance Minister’s delayed 2025 budget speech highlighted excessive government spending, which is clearly shown in the budget deficits over the last 15 years.

Finance Minister Enoch Godongwana was set to table his 2025 Budget Review on Wednesday, 19 February 2025.

However, due to a dispute regarding the planned 2 percentage point value-added tax (VAT) increase, it was postponed until Wednesday, 12 March 2025.

Godongwane explained that the VAT increase to 17% was needed to raise an additional R58 billion to address its spending needs.

He said this money was needed to fund public sector wage increases, expand early childhood development, and retain teachers and doctors.

The money was also needed to revitalise the commuter rail system and provide above-inflation increases to social grants.

Numerous cabinet members opposed the VAT increase, arguing that it is anti-growth and would disproportionately hurt poor South Africans.

Agriculture Minister and DA leader John Steenhuisen said there could be no further tax increase as South Africa is at risk of economic failure.

He highlighted that South Africa’s gross domestic product (GDP) per capita declined for 12 years, making South Africans poorer.

“We have the world’s highest unemployment rate and have been at the top of the list for decades,” he wrote in a Business Day column.

“We are in debt up to our necks and are taxed more than people can bear. As a consequence, our options are close to exhausted.”

Steenhuisen argued that South Africa cannot continue driving up its debt-to-GDP ratio, as it increases its annual repayments.

“We already spend 21% of our budget on borrowing and servicing debt. If we borrow more, our creditors will make us pay even more to borrow their money,” he said.

The increased debt resulted from government failures, mismanagement, corruption, and overspending from 2009.

Since 1994, South Africa has only experienced two years in which it did not spend more money than it received.

The rest of the time, the government has spent much more money than what it received in tax revenue.

Over this period, it pushed South Africa into deeper deficits and had very little to show for it. Despite the increased spending, living standards decreased.

The most recent 2023/24 financial year saw the government again overspending, with its expenditure being R331.4 billion more than what it received in tax revenue.

The chart below shows the budget deficits (red) and surpluses (green) since 1994, when South Africa held its first democratic elections.

South Africa’s debt and a possible budget surplus

Government deficits are funded by either debt or increased monetary issuance, i.e. printing money, which leads to higher inflation.

Government debt has consistently been rising, making interest expenditure on government debt the fastest-growing line item on the national budget.

The 2023/24 interest expense on government debt alone cost South Africa R356 billion. Without this line item, South Africa would have had a budget surplus.

Another major line item in the government’s expenses is social grants and transfers. For the 2023/24 budget, this expense amounted to R268 billion.

The government also spends R191 billion on government employee compensation. Many people argue that this should be cut significantly.

The most significant expense on the national budget is funding to provinces and municipalities to deliver basic public services.

These funds are meant to provide provinces and municipalities with the necessary funding to provide citizens with public services.

The chart below shows the biggest line items in South Africa’s national budget.

Where to cut state spending

Most economists said instead of raising taxes, the government should cut spending to ensure it creates a budget surplus.

Over the past thirty years, the national budget has become constrained by bloated employee compensation, government grants, and debt.

Instead of focusing on economic growth, the government raised taxes to cover its growing expenses.

This strategy increased South Africans’ tax burden, significantly increasing personal income tax and VAT.

The state also introduced many new taxes to fund its excessive spending, including capital gains taxes, dividend taxes, a plastic bag levy, electricity levies, and a sugar tax.

Efficient Group chief economist Dawie Roodt told Daily Investor that the government could cut expenditures in numerous places.

He said personal income tax, corporate income tax, and VAT are already at their maximum levels and should not be increased further.

He argued that the budget postponement signals a turning point for the government, where it will be forced to cut spending instead of raising taxes.

He said the government should start with salaries and wages. He said most government employees are “overpaid and underworked.”

This expense item has been allowed to get out of hand and is again set to be increased above inflation. Roodt said this increase must be cancelled immediately.

Although cutting the number of government employees and stopping big salary increases is politically difficult, it has to be done.

The second area where Roodt pointed to government cuts is within state-owned enterprises, which have been run into the ground.

State-owned enterprises should either be closed or privatised. The savings should be allocated toward paying off government debt.

Roodt also highlighted that many government departments are unnecessary and must be closed. These include:

• Department of Small Business Development.
• Department of women, youth and persons with disabilities
• Department of Sport.

He said one of the most important things that needs to happen in government is for efficiency to dramatically improve and corruption to be wiped out.