Only one option left for South Africa

Finance Minister Enoch Godongwana’s only option to prevent South Africa’s finances from deteriorating further is to cut state spending.

Godongwana was set to deliver his 2025 Budget Speech in the National Assembly on Wednesday, 19 February 2025.

The finance minister wanted to increase value-added tax (VAT) by 2% to 17%, which he described as necessary.

He said this increase was needed to fund public sector wage increases for our civil servants and expand early childhood development opportunities.

It would also be used to retain skills in the public sector, revitalise the commuter rail system, and increase social grants above inflation.

However, numerous cabinet ministers opposed the VAT increase, saying it would harm economic growth and hurt the poor people.

This caused Godongwana to postpone the 2025/26 annual budget to 12 March 2025, the first time this has happened in democratic South Africa.

He explained that this postponement will give stakeholders time for further deliberations within the Government of National Unity (GNU).

The Finance Minister said the budget must “strike a balance between the interests of the public, economic growth, and financial sustainability”.

Professor Raymond Parsons from the NWU Business School said this postponement will have unintended consequences for South Africa’s political economy.

“If the eventual Budget in March turns out to be truly committed to growth and job creation, the delay will be worthwhile,” he said.

He said the controversy over the tax burden is symptomatic of the long-term low economic growth in South Africa.

“The tax base as a whole has shrunk as a result, given persistently low growth, thus limiting financing options,” he said.

He added that the budget postponement will create an elevated level of policy uncertainty for now, which has already been reflected in the rand.

“Markets will now carefully monitor the progress being made by the GNU in finding sufficient consensus about the final Budget,” he said.

Only one option left

Parsons said between now and 12 March 2025, there should be an informed and reasonable debate about what fiscal options are available to South Africa.

The National Treasure will need to strike the right balance between spending, borrowing, and taxing in ways that promote policy certainty and job-rich growth.

Krutham managing director Peter Attard Montalto said the 2% VAT increase would have raised around R60 billion.

He added that making this up through other taxes is very challenging. “Some tax changes are possible, but there is no lever as big as VAT,” he said.

Attard Montalto said the planned fuel levy freeze could be removed, and excise duties on alcohol and tobacco could be increased.

The government could also stop its planned expansion of the zero-rating basket, but this option is politically sensitive.

These interventions would only raise around R8 billion annually, which is much less than what a 2% VAT increase would have generated.

Reserves in the budget could be narrowed and the primary path could be shifted from outperforming the MTBPS to being in line with the MTBPS, saving R12.3 billion next year.

“All this perhaps means that the real hole is about half next year, translating into R30 billion,” he said.

Many economists agreed with Attard Montalto that increasing other taxes can have significantly negative effects.

• Personal income tax – South Africans are already overtaxed and increase personal income taxes will increase non-compliance and drive away the top taxpayers.

• Company taxes – Increasing company taxes will reduce investment in South Africa and slow economic growth. It will also drive companies out of South Africa.

• VAT – Increasing value-added tax (VAT), even by 1%, is politically unpalatable and is unlikely to be supported.

This leaves the South African government with only one choice to make ends meet – reducing state spending.

The state is bloated, and renowned economist Dawie Roodt previously said government employees are overpaid and underworked.

Although politically unpalatable to the left-leaning government, reducing state spending is a positive step and the only option to avoid further financial strain.