South Africa’s GNU back from the brink

South Africa’s coalition government appears likely to remain intact after the National Treasury abandoned a divisive plan to raise taxes and agreed to revise the budget. 

In February, the Treasury proposed hiking the value-added tax rate by two percentage points to 17% over two years, sparking an outcry, and the proposed increase was halved three weeks later.

However, the Democratic Alliance, the second-biggest party in the administration, remained opposed to the move and challenged it in court, sparking a fight with the larger African National Congress.

Concern among investors that the business-friendly DA could quit the so-called government of national unity and that populist parties would take its place has weighed on the nation’s assets.

The diminishing likelihood of that happening any time soon — and the Treasury’s plan to cut spending to cover a R75 billion hole in the budget over the next three years — saw the rand gain as much 0.5% against the dollar and yields on 10-year sovereign bonds fall to a three-week low on Thursday. 

“This is the complete turnaround — I can only see it as the win for the DA,” which wants to find a way to remain part of the government, while the ANC has hopefully learned what power-sharing means, said Susan Booysen, a politics professor at the University of the Witwatersrand in Johannesburg.

“It is certainly a severely damaged and dented GNU” that has emerged from the dispute, but it remains possible that it will endure, she said. 

The DA has accused the ANC of ignoring its partners in devising the budget and many other policies. Its opposition to the VAT hike is part of an attempt to assert itself in the decision-making process.

The Treasury said its climbdown followed extensive consultations with political parties, and that the Finance Ministry had approached the DA about ending its lawsuit challenging the VAT increase on procedural grounds.

The High Court heard the case earlier this week and is due to make its ruling by April 29.

The ANC led South Africa outright for three decades after the end of apartheid before losing its parliamentary majority in last year’s elections, which prompted President Cyril Ramaphosa to establish the 10-party coalition.

Besides sparring over the budget, its main members have clashed over education, health and land-expropriation laws.

“What the future is going to be for the GNU is something that I cannot categorically answer now,” Helen Zille, chairwoman of the DA’s Federal Council, told reporters in Cape Town.

“The big problem is we have to operate in a very low-trust environment.”

The ANC and the DA are scheduled to hold talks in Johannesburg on Friday. 

“Moves to remove the DA from the GNU, given the current geopolitical landscape, I think would be a very damaging thing for the South African economy,” party leader John Steenhuisen said in Pretoria on Thursday.

“As the current GNU, we have a sufficient majority to be able to pass legislation and to bring stability.”

The ANC’s caucus in parliament said the impasse over VAT illustrated the need for a more inclusive and transparent budgeting process and that it looked forward to building on the cooperative spirit among political parties to tackle multiple national problems. It didn’t specify whether it supported retaining the coalition in its current form. 

While administratively messy, the U-turn on VAT “represents an upside for the GNU, which has been on the verge of collapse,” said Anne Fruhauf, managing director of risk adviser Teneo.

“The DA will now have less justification for quitting the coalition or opposing subsequent budget bills.”