Will South Africa have a peaceful transition into the 2025/26 budget, or will the headwinds blow against the adoption of the budget?
After a tumultuous attempt at squeezing a last minute VAT increase through the door, putting paid to a possible adoption of the budget last month, the finance ministry has been working behind closed doors to find a revised budget that will see the Government of National Unity (GNU) partners supporting it.
Despite the Finance minister Enoch Godongwana, making a public statement that they had found an agreed to alternative, opposition leaders were still indicating that this was not the case.
What is at stake?
Currently, there is a shortfall to the not so paltry amount of R300 billion that the finance ministry says it will require to fill a budget gap.
The contention around this is that they plan to ask the public to cough up more taxes to fund a completely bloated and under-performing government.
South Africa currently has one of the largest and highest paid government structures globally and as far as most are concerned, are receiving very little return on their tax investment in the country.
Economic growth in the past year was at less than 1% and is one of the lowest in Africa currently. This together with regular power outages and water supply issues, is making things ever more constrained for the average middle class person, not to mention the impact on the poor and unemployed.
The unemployment rate is also of the highest globally and social grants that are escalating in number every year, are not the solution for the floundering economic woes in South Africa.
Spending Cuts Unlikely?
Sadly it is highly unlikely that we will see a major pull-back on government expenses, that is highly needed nor a reduction in government salaries that are a massive burden in the fiscus of the country.
Money should also be re-allocated to projects such as infrastructure, maintenance and development, that could be a catalyst for better growth, rather than increasing bloated salaries.
What is a Likely scenario?
The probability is that the response from the finance ministry is likely to continue to be tone-deaf to the struggles in the streets, and there is probably some kind of compromise of a reduced increase in the VAT rate.
The simple explanation is that this revenue is easy to collect and is the path of least resistance from the Revenue services point of view.
The popular “sin Taxes are also likely to be targeted yet again, despite the alcoholic beverage industry indicating that they are at a tipping point where further penalty increases in taxes will simply reduce sales and not overall tax revenues.
There are also likely to be more levies introduced, on things such as capital gains in investments, property sales and municipal services as well as potentially additional fees added to property rates that would be used to fund failing State Owned Entities such as the SABC and electricity and water supply entities.
In a little less than an hour from now we will begin to know the exact details and all we can hope for is that some semblance of sanity will prevail.
PWC’s Budget Predictions
Regarding Economic growth
The South African Reserve Bank (SARB) published encouraging economic
growth forecasts for 2025-2027 in January 2025, averaging 1.9% p.a. over
the three-year period. It is likely that the National Treasury will also make
similar strong projections for economic growth over the medium term. A more
conservative approach to the economic growth outlook would, however,
provide realism into the outlook for fiscal revenues. Fiscal budgets perennially
over-estimate economic growth and, inter alia, expected fiscal revenues.
Regarding The Fiscal Balance
The National Treasury will reaffirm its commitment to
narrowing the fiscal deficit as a tool to stop the rise
in public debt (as a percentage of GDP) over the next
several years and enable a peak in this ratio. The budget
speech will likely have more encouraging deficit forecasts
compared to our own. This prediction is based on
expectations that the National Treasury will forecast higher
rates of economic growth compared to PwC’s projections
over the next few years.
Spend Cut Prediction
Given the constraints in economic growth and thus the
revenue outlook, as well as unanticipated expenditure
demands, it is almost inevitable that there will be spending
cuts in certain areas. We expect to see reductions in
underperforming programs, especially where allocations
have not been fully or effectively utilised.
Due to the much discussed “lack of state capacity”, a lot of
funds have gone unspent. We expect that this is where the
big target for reductions will be to fund areas where there
are new pressures on spending.
