GNU Is Confronting Yet Another Budget Challenge

South Africa’s finance minister is preparing for a second attempt to present an acceptable budget to a divided coalition government, raising concerns over future investments in the nation if it fails to be approved.

“Currently, investors are highly focused on the stability and effectiveness of the government of national unity,” commented Elna Moolman, head of macroeconomic research for South Africa at Standard Bank Group. “Any further disruptions in the budget process would be seen as a sign that the GNU is struggling, which would lead to lowered expectations regarding growth and fiscal reforms.”

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Enoch Godongwana and his team at the National Treasury were forced back to the drawing board last month after his revenue and spending proposal failed to garner support from parties like the Democratic Alliance, the second-largest group in the GNU. This marked the first budget postponement in over 30 years.

Since the delay, South Africa’s bond yield curve has steepened, as long-term yields increased due to concerns regarding the outlook for government borrowing.

The contentious issue was a suggested two percentage-point hike in the value-added tax (VAT) rate — a tax on goods and services — to 17%. Subsequent discussions have aimed at achieving a compromise within the coalition.

The coalition emerged last year after the African National Congress lost its outright majority for the first time since the end of apartheid in 1994. This has complicated the budgeting process, necessitating cross-party consultation rather than unilateral decisions by the ANC.

The proposed VAT increase in the scrapped budget would have generated R60 billion for the fiscal year starting on April 1.

In the revised proposal, an “obvious” compromise might involve raising VAT by 0.5 to 1 percentage point, along with a more modest increase in spending than originally suggested, stated Andrew Matheny, an economist at Goldman Sachs Group Inc.

“I don’t believe they will proceed with the entire R60 billion in proposed spending,” he noted. “That will be part of the compromise.”

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Most economists surveyed by Bloomberg also predict a VAT hike within that range. Two sources informed about the budget discussions reported that a 0.5 percentage-point increase would receive backing from cabinet members if the Treasury commits to expediting economic growth and suggests significant spending adjustments.

The Democratic Alliance will only support a budget that embraces pro-growth reforms, including the concessioning of Cape Town port, firm timelines to eliminate structural bottlenecks, and thorough spending reviews, party leader John Steenhuisen asserted over the weekend.

He considers it improbable that the budget would be postponed again; however, if his party’s conditions are not fulfilled, it will not vote in favor of its approval. This could prompt a “scramble” in parliament for the coalition to secure backing from parties outside of its alliance.

Parliament is anticipated to vote on the budget in May, although segments of it will be deliberated prior to that date.

Mpho Molopyane, chief economist at Alexforbes, expects the budget to reflect the coalition government’s pledge to strengthening a capable state and fostering economic growth.

“However, they will need to roll back some of the expenditure commitments or plans initially allowed in the now-postponed budget,” she remarked. “How much they adjust on the revenue side will hinge on their ability to prioritize differently on the expenditure side.”

Despite this, coalition members remain divided on spending matters. While the DA advocates for deeper cuts, Godongwana has warned that such actions could undermine essential government services, particularly with local government elections approaching next year.

“The silver lining is that there seems to be considerable consensus on the necessity for fiscal consolidation among the primary parties in the GNU,” said Matheny. “The disagreement lies in how to achieve it.”

Additional options for the Treasury include increasing the fuel levy and taxes on alcohol and tobacco, suspending pension fund contributions for state employees, and augmenting borrowing — although this latter option would be counterproductive in achieving debt-stabilization objectives.

In the drafted budget, the Treasury projected that debt would peak at 76.1% of gross domestic product in 2025-26, while economists surveyed by Bloomberg predict a peak at 76.5% of GDP.

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