South Africa’s finance minister is gearing up for a renewed effort to present a budget that satisfies a fractured coalition government, raising alarms about potential future investments in the country if it fails to gain approval.
“At this moment, investors are deeply concerned about the stability and efficacy of the government of national unity,” remarked Elna Moolman, head of macroeconomic research for South Africa at Standard Bank Group. “Any additional disruptions in the budgetary process would indicate that the GNU is faltering, which would reduce expectations for growth and fiscal reforms.”
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Enoch Godongwana and his team at the National Treasury were compelled to revisit their proposals last month after their revenue and expenditure plan failed to win support from parties such as the Democratic Alliance, the second-largest party within the GNU. This incident represented the first budget delay in over three decades.
Following the postponement, South Africa’s bond yield curve has exhibited a steepening trend, as long-term yields have risen due to concerns over government borrowing outlook.
The contentious topic was a proposed two-percentage-point increase in the value-added tax (VAT) rate — a tax applied to goods and services — raising it to 17%. Negotiations have since aimed at reaching a compromise within the coalition.
The coalition was formed last year after the African National Congress lost its overall majority for the first time since the conclusion of apartheid in 1994. This has complicated the budgeting process, necessitating consultation between parties rather than unilateral decisions by the ANC.
The proposed VAT increase in the discarded budget was projected to generate R60 billion for the fiscal year commencing on April 1.
In the modified proposal, a “clear” compromise might involve an increase in VAT by 0.5 to 1 percentage point, along with a more restrained increase in spending than originally proposed, according to Andrew Matheny, an economist at Goldman Sachs Group Inc.
“I don’t anticipate they will move forward with the full R60 billion in proposed expenditures,” he commented. “That will form part of the compromise.”
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Most economists surveyed by Bloomberg also foresee a VAT hike within that range. Two sources familiar with the budget discussions indicated that a 0.5 percentage-point increase would receive support from cabinet members provided the Treasury commits to accelerating economic growth and proposes substantial spending adjustments.
The Democratic Alliance will only endorse a budget that incorporates pro-growth reforms, including the concessioning of Cape Town’s port, definite timelines to eliminate structural bottlenecks, and comprehensive spending reviews, party leader John Steenhuisen stated over the weekend.
He considers it unlikely that the budget will be postponed again; however, if his party’s conditions are unmet, it will not vote in favor of its passage. This could trigger a “scramble” in parliament for the coalition to secure support from external parties.
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Parliament is expected to vote on the budget in May, although portions of it will be debated prior to that date.
Mpho Molopyane, chief economist at Alexforbes, anticipates that the budget will reflect the coalition government’s commitment to strengthening a capable state and promoting economic growth.
“However, they will need to retract some of the expenditure commitments or plans initially outlined in the now-postponed budget,” she noted. “How much they adjust on the revenue side will depend on their ability to prioritize differently on the expenditure side.”
Despite this, coalition members remain divided on spending policies. While the DA advocates for deeper cuts, Godongwana has warned that such measures could weaken critical government services, especially with local government elections approaching next year.
“The silver lining is that there appears to be significant consensus on the necessity for fiscal consolidation among the primary parties in the GNU,” stated Matheny. “The disagreement lies in the method to achieve it.”
Additional options available for the Treasury include increasing the fuel levy and taxes on alcohol and tobacco, suspending pension fund contributions for state employees, and increasing borrowing — although this latter option would counteract efforts to achieve debt stabilization targets.
In the drafted budget, the Treasury projected that debt would reach a peak of 76.1% of gross domestic product in 2025-26, while economists surveyed by Bloomberg predict a peak of 76.5% of GDP.
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