Government wake-up call

The unprecedented postponement of South Africa’s Budget due to a proposed 2% VAT hike is a wake-up call that a coalition government requires processes to involve all partners in decision-making.

The Bureau for Economic Research’s (BER) Lisette IJssel de Schepper and Claire Bisseker highlighted the reasons for this in their latest weekly newsletter.

Finance Minister Enoch Godongwana was set to present South Africa’s 2025 Budget on Wednesday, 19 February.

Earlier that week, the DA, which forms part of the Government of National Unity (GNU), warned it would not approve a Budget that introduces tax hikes for South Africa.

On the day the Budget was set to be tabled, President Cyril Ramaphosa called an emergency Cabinet meeting to get all coalition partners to sign off on it.

However, the parties could not reach a consensus in time, and, in an unprecedented move, the Budget was postponed to 12 March to give the GNU time to reach an agreement.

Following this announcement, DA leader John Steenhuisen revealed the crux of contention in this Budget – a 2% hike in the value-added tax (VAT).

The BER said there are no immediate risks to postponing the Budget from an economic perspective. 

“The initial uncertainty about what caused the 11th-hour delay and what it would mean for the way forward led to a depreciation of the rand exchange rate, while bond yields ticked up,” they said.

“Both have recovered since, with the rand trading stronger than pre-budget levels by Thursday afternoon.”

In addition, from a legal perspective, the Public Finance Management Act allows a new Budget to be tabled and allows spending to continue until a budget is passed. 

However, they warned that putting together a ‘new’ Budget by 12 March will be daunting, especially one that would appease all GNU partners.

“But it makes sense that their input should be considered,” they said. “Indeed, the postponement in itself is seen by many – including the GNU parties – as a sign that the GNU is working.” 

However, they said it is unfortunate that this conflict only escalated at the very last moment, given the mammoth task of preparing a Budget. 

“Hopefully, this is a wake-up call that a coalition government requires processes to involve all partners in decision-making.”

They explained that, from a practical perspective, the discussion among GNU parties and Treasury will likely turn into one about trade-offs. 

“If they are adamant about not raising VAT, there is no money for the ‘new’ expenditures—so what will they be willing to forfeit, or where else could the money be found?” 

“It is also important to highlight that the Treasury’s assumptions about the revenue that the VAT hike could bring in are, in our view, optimistic.”

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

“Nonetheless, if the eventual Budget in March turns out to be truly committed to growth and job creation, the delay will be worthwhile if the GNU gets agreed ‘trade-offs’ and better economic outcomes.”

“Fundamentally, the sharp controversy about the tax burden can be seen as symptomatic of the fact that economic growth in South Africa has been too low for too long.” 

He warned that the postponed Budget will create an elevated level of policy uncertainty for now, which has already been reflected in the rand. 

“Markets will now be carefully monitoring the progress being made by the GNU from now on in finding sufficient consensus about the final Budget,” he said. “It also comes at a time global when risks to South Africa are also higher.”