Budget hits a brick wall

24 February 2025: Does the postponed budget portend the end of the GNU? Can South Africa escape its low-growth trap? Will G20 Summit upgrades fix service delivery issues in Johannesburg? Can the ANC arrest its electoral decline in Gauteng?

Budget hits a brick wall

The 2025 National Budget, originally set to be tabled on 19 February, has been delayed to 12 March — a first for South Africa's democratic era. The National Treasury has three weeks to recalibrate the budget after a rift between the African National Congress (ANC) and its partners in the Government of National Unity (GNU) over a proposed value-added tax (VAT) increase from 15% to 17%. The ANC needs the GNU partners’ votes to pass the budget.

The 2025 Budget Review, though not yet formally tabled, reveals the pressures driving the VAT debate. The Treasury aimed to expand early childhood development programs, hire more teachers and healthcare workers, pay for increases in the government wage bill after recent negotiations, and meet court-ordered increases to the Social Relief of Distress grant. With the VAT hike now in limbo, it is unclear how the Treasury will bridge the funding gap.   

The Treasury has little room to adjust personal income tax (PIT) because the tax base is worryingly narrow. According to the draft Review, about 560,000 individuals — out of 7.8 million registered taxpayers — contribute half of all PIT. Even more striking, only 240,000 of the 7.8 million — or 3% — account for 33.1% of PIT. A narrow tax base means any rate hike could choke spending and growth. The Treasury is also in a bind, with little room to borrow.

The postponement is not a sidestep. A scaled-down VAT increase or fresh fuel levy hikes (the first since the 2023 budget) are still in play. The Rand’s 0.9% stumble following the delayed announcement betrays market nerves, and the jitters could persist if the March plan disappoints. For now, limbo. The Treasury's next move can either ease pressures through restraint or deepen uncertainty by leaning harder on borrowing — a fork in the road that could sway confidence and economic stability in sharply different directions.

Treasury shows a lack of imagination

A sliver in the (former) budget text illustrates a dearth of new, pro-growth policy thinking: “In assessing our options, we were confronted with three choices: Continue to cut funding to essential services that our people depend on. Take on expensive debt that would burden future generations. Or make strategic tax adjustments to secure our nation’s future.”

Two options are not entertained in the Budget Review:

The first can be implemented at short notice and produce maximum positive consequences. Currently, the state is overspending by design in public procurement. It is not buying on a value for money basis. By shifting public procurement to a value for money basis, the state can buy the same amount of goods and services while spending less. Doing so will release enough funds to cut the VAT rate instead of raising it, stimulating economic growth instead of suppressing it. A recent Institute of Race Relations research paper, Blueprint for Growth 2: Cut VAT & BEE, finds a potential R150 billion in savings could be achieved by reaping the “Zondo Dividend”. The Zondo Report recommended that regarding public procurement, “maximum value for money in the procurement process” should be the aim, as opposed to spending extra on BEE preference premiums.

The second option is to achieve higher GDP growth rates by reforming policy and legislative barriers to capital formation, foreign direct investment, and economic activity. While it is not the mandate of National Treasury to make the economy grow, the entity should utilise its ability to influence other government departments, from national down to municipal level. At the very least, Treasury can be one of the champions of economic growth.

The 2025 Budget Review figures confirm the serious lack of purchasing power in the country; 6.5 million people earn less than R8,400 per month. Less taxable income places additional pressure on Treasury and the government to scramble for other tax revenue ideas and streams.

Between 2013 and 2023, South Africa averaged 0.8% GDP growth per annum. The short-to-medium prospects are similarly unimpressive — Treasury forecasts average growth of 1.6% over the medium term. This is unlikely to shift the needle of high unemployment and grinding poverty meaningfully. The GNU is under intense pressure to speed up reforms that will trigger faster economic growth, extending beyond just addressing network industry problems and ranging into substantive policy reforms.

Drilling for services

As the capacity of the state to provide services declines, private citizens and companies are having to fill the gap. This can produce unintended consequences, as occurred last week when a property owner drilled a borehole on their property but inadvertently punctured the Gautrain tunnel between the Rosebank and Park stations. With water and soil leaking into the tunnel, services were partially suspended.

Following the accident, Gauteng Public Safety MMC (Member of the Mayoral Committee) Mgcini Tshwaku warned: “All those found drilling without approval will be arrested, their equipment will be confiscated, and they will face the full might of the law.” Unfortunately for MMC Tshwaku and his government colleagues, the longer state services decline and water outages multiply, the higher the probability of similar events occurring in the future. Throughout, municipalities will receive lower and lower revenue collections, as citizens make less use of those services and replace them with private alternatives.

A short-term focus on fixing street and traffic lights, as well as freshening up road markings and cutting verges in areas of Johannesburg that G20 dignitaries might see, will not fix the overall decline of state services in the metro. Citizens and businesses will be subjected to ongoing inconsistent service delivery, until at least the 2026 local government elections.

Provincial ANC structures in the crosshairs

The ANC has moved to intervene in its provincial structures in Gauteng and KwaZulu-Natal (KZN), the two provinces where it saw the biggest declines in last year’s election. In Gauteng, the ANC saw its vote share slip from 50.2% to 34.8% while in KZN, its decline was even more marked, tumbling from 54.2% to 17.0%. In Gauteng, the ANC remained the single biggest party, forming a minority administration with the help of smaller parties, while in KZN, it is the junior partner in the provincial coalition government, along with the Democratic Alliance, Inkatha Freedom Party, and National Freedom Party.

In no other province, with the exception of Mpumalanga (where the ANC saw a nearly 20-point decline), did the ANC vote share decline by more than ten points. The declines — especially in KZN and Mpumalanga — were primarily because of the rise of the uMkhonto weSizwe Party.

The ANC has seconded two veterans to fix the problem, the former mayor of Johannesburg, Amos Masondo, in Gauteng and a long-serving cabinet minister, Jeff Radebe, for KZN. These deployments reveal a number of things about the current ANC. The fact that it has taken so long to disband the two provincial executive committees (PECs) (about eight months) and “deploy” two veterans shows a party incapable of moving quickly. It is a party that is ossified.

In addition, the two people it has sent to fix the problems, while respected within the party, are both in their seventies and have been retired from active politics for some time. It is an open question whether they will be able to manage the complicated political dynamics within the provinces.

At the same time, the ANC’s chair in Gauteng, Panyaza Lesufi, and in KZN, Sboniso Duma, still hold positions in the new structures, while other senior PEC members have been booted out. It does raise the question whether the provincial party structures can be renewed if the two most senior people in those two provinces are still involved in the reconfiguration.

This is also likely to heighten factional conflicts within the party. Questions have been raised within the party; that if the Gauteng and KZN PECs are being reconfigured, something similar should happen to the party’s national executive committee, seeing as the ANC also suffered a precipitous decline at national level in last year’s poll.

Sakeliga: government plans to publish race quotas for employment by end of March

Following from a 2023 amendment to the Employment Equity Act, the Department of Employment and Labour (DoL) will publish employment “targets”, effectively quotas, by the end of March. These will be based on race, sex, and disability. For the time being, the quotas will be applied to companies that employ more than 50 people; it is likely that this threshold will over time be lowered to include smaller companies. All employers, including non-profits and international businesses operating in South Africa, will be subject to the new quotas.

Penalties for non-compliance include exclusion from doing business with the state, and fines of up to 10% of a company’s turnover. Should the DoL proceed, business association Sakeliga has indicated it will pursue litigation on “substantive and procedural grounds”.