With finance minister Enoch Godongwana set to table Budget 3.0 on May 21, he is torn between the urgent priorities of raising extra revenue, cutting spending and increasing investment.
The minister announced he would return to parliament to once again table a budget after introducing the rates and monetary amounts and the amendment of revenue laws bill to “reverse” his 0.5% percentage point VAT hike, which was widely rejected by political parties and the public.
“Part of the difficulty we have not been talking about is [that] we are all new to what is called coalition politics, and there are lessons to be learned by the cabinet and the legislature, and by ourselves,” Godongwana said at a press conference on Wednesday.
“I’m also pleased that we have agreed we will balance the budget without raising VAT, while protecting vital services like education, health, and social grants. Going forward, the Treasury’s focus is threefold … managing our costs better … strengthening revenue collection … and laying a strong foundation for economic growth.”
Godongwana has faced calls for his resignation following the budget fiasco, especially over his insistence to force through an unpopular VAT hike. He has resisted the calls, while President Cyril Ramaphosa has also come to his defence.
Miyelani Mkhabela, director and chief economist at Antswisa Management Group, said the political configuration of the GNU has been well received by the market and business groups remain in favour of the coalition. He said South Africa didn’t have alternative pathways because of the history and evolution of its politics.
Institutional investors have been complaining about good governance and accountability principles since 2015, and the required economic reforms haven’t been implemented. “The short to medium-term purpose of the GNU is to bring political and economic stability and integration of leadership in processes for unity and desired outcomes. Adaptation is political, psychological, and complexities are natural in a GNU, especially one that is poorly managed, which risks creating investor uncertainty.”
Mkhabela said the discord around the revenue proposal has laid bare South Africa’s other economic weaknesses, and risked pushing the fiscal approach further in the direction of austerity.
Prof Raymond Parsons of North-West University’s school of business said the emphasis in the third budget must fall on solutions such as further recalibrating government spending, strengthening Sars’ tax collection capacity, and getting the economic growth rate up.
“Clearly the Treasury’s original 2025 GDP growth of 1.9% underpinning tax revenues is too optimistic in the light of changed global and domestic economic trends. Hence, tough decisions remain if South Africa is to ‘balance the books’ and ensure fiscal sustainability.”
Parsons said it was essential that the third budget at least holds the line on its present commitment to a 76.2% debt-to-GDP ratio. “There will still need to be fiscal compromises and trade-offs, but there is now a better chance of political backing for a third budget fiscal strategy. It is now widely recognised that the budget process needs to be more transparent and consensual in nature.”
Raising VAT to 15.5% would have hurt poorer households, even with the promise of expanding zero-rated products to include offal.
If you look at the entire offal consumption by largely poor households, the overwhelming majority of that offal is actually imported as waste quarters coming in from other large poultry producing nations of the world.
— Ayabonga Cawe, commissioner at the International Trade Administration Commission
Ayabonga Cawe, the commissioner at the International Trade Administration Commission, said Treasury’s plan to expand the zero-rated goods list to protect low-income households from the VAT would have been ineffective, and deepened import intensity in some categories.
“If you look at steel, and even in consumer products, there is an increasing import-intensity of our consumption, such that even zero rating of something like offal, I think is a bad policy choice,” he said.
“If you look at the entire offal consumption by largely poor households, the overwhelming majority of that offal is actually imported as waste quarters coming in from other large poultry producing nations of the world.”
Cawe said the government needed to consider that the extent of zero rating runs the risk of giving rise to deepening import-intensity to fund household consumption.
Itac’s oversight of a rebate allowing poultry products to enter the South African market duty-free, two fifths of poultry imports entering the market in the avian flu rebate have been for offal. However, fridge level prices indicated that wholesalers and retailers were “capturing” the rebate margin, he said.
Speaking at a roundtable organised by the Financial and Fiscal Commission (FFC) before the minister announced the withdrawal of his VAT hike, Trevor Fowler, a former FFC commissioner, warned that a budget characterised by spending cuts would exacerbate weaknesses in South Africa’s already embattled economy.
“I have observed over many years… if the government doesn’t spend, the private sector doesn’t spend. And when they do spend, they will spend only in their interests; that’s why government has to spend. So, an austerity budget, in my sense, can’t work… Why are we going to an austerity budget when we should be spending on infrastructure that gives you a return?”
Efficient Group economist Dawie Roodt said constrained revenue, limited prospects of tax, and unstable fiscal accounts means a reduction in spending is the only option.
Independent economist Duma Gqubule said South Africa had several revenue options, including:
- the Gold and Foreign Exchange Contingency Reserves Account;
- surpluses in the Unemployment Insurance Fund (which has R140bn);
- the Public Investment Corporation’s R30bn surplus; and
- the Government Employees Pension Fund, which accumulated a R645bn surplus over the past 12 years.
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