Budget Speech Showdown: Godongwana Faces Tough Choices Amid Economic Strain

Finance Minister Enoch Godongwana is set to deliver the highly anticipated revised 2025 Budget Speech on March 12th, facing a formidable task of balancing increased spending demands with a fragile economy and a public wary of tax hikes. The original February budget, proposing a 2 percentage point increase in VAT, was swiftly rejected, setting the stage for a crucial reassessment of fiscal policy.

The core focus of the revised budget will be on how the government intends to fund a net increase in new spending of R173 billion over the next three years, and the subsequent impact on economic growth. This comes against the backdrop of South Africa’s elevated debt levels, currently at 76% of GDP, with debt servicing costs consuming a significant 21.1% of gross tax revenues.

A Balancing Act: Spending vs. Revenue

The rejected February budget’s proposed VAT increase, estimated to generate R191 billion, highlighted the government’s struggle to maintain a primary budget surplus of 0.5% of GDP (approximately R34 billion) for the 2024/25 fiscal year. An increase in spending without a corresponding rise in revenues would jeopardise this target.

Where the Money Goes: Spending Priorities

The proposed increase in current spending is primarily focused on:

Enhancing Compensation and Hiring: 21.6% is allocated to improving compensation and hiring in front-line departments.
Other Spending Initiatives: 21.6% is directed towards various initiatives, including employment programs, SANRAL, debt repayment, SANDF troop deployment in the DRC, local government elections, and direct charges.
Infrastructure Investment: 26.9% is earmarked for infrastructure, including R19.2 billion for Prasa and R11.8 billion for infrastructure projects.

Political Hurdles and Social Grants

The fiscal challenge is compounded by political considerations. Recent reports suggest that the Government of National Unity (GNU) has yet to reach an agreement on the fiscal framework. Furthermore, the Minister of Finance has linked the proposed VAT increase to the financing of a permanent social grant, a move that is sure to spark further debate.

Seeking Solutions: Alternative Revenue Measures and Spending Reviews

With a 2 percentage point VAT increase unlikely, alternative revenue measures are being considered. These include:

Bracket creep.
Fuel levy increases.
Adjustments to medical aid tax credits.
Customs duties.
Potential smaller VAT increases combined with bracket creep.

A constructive development would be the announcement of a comprehensive spending review, aimed at enhancing the efficiency of government spending. National Treasury has managed core non-interest spending to counter SOE bailouts, resulting in a decline in real spending per person since 2016.

The need to reform the social grant system and skills levy is also critical. The current system lacks cohesion, and there is no clear link between social security and employment goals.

Looking Ahead: Medium-Term Objectives

While immediate solutions are crucial, medium-term objectives include enhancing SARS’s tax capacity and implementing comprehensive tax administration reforms, as suggested by the IMF. The digitisation of revenue administrations also holds potential for increased tax collection.