In South Africa’s short history as a true democracy, the Finance Minister and National Treasury have always run a credible, professional budgeting process. As such, the last-minute postponement of Finance Minister Enoch Godongwana’s budget speech for the upcoming tax year came as a shock to economists, investors, and the public at large.
But given that we’re in the unchartered waters of a Government of National Unity (GNU), this development should perhaps not be that surprising. As experience around the world shows, coalition governments squabble and even collapse due to disagreements about how money should be raised and spent.
This marks the first time the African National Congress (ANC) has needed support from other parties to pass its budget, following the loss of its parliamentary majority in the 2024 elections. A delay was necessary after the Democratic Alliance (DA), the second largest party in the GNU, said it could not vote for the budget in its present form.
The biggest bone of contention for the DA and other parties in the GNU was National Treasury’s proposal to hike VAT by two percentage points to raise R58 billion in pay for larger-than-expected public sector wage raises, early childhood education, increases to social grants, and commuter rail infrastructure.
The DA and other parties believe that the Finance Minister and National Treasury haven’t adequately addressed alternative proposals to cut government spending and raise funds. They argue that, even with the expansion of zero-rated VAT categories and increases to social grants, a VAT increase is a regressive measure that will harm the poorest the most.
Members of the GNU and the president have moved swiftly to calm markets after the unprecedented delay of the Budget Speech. The new date for South Africa’s budget is 12 March and it is likely to proceed relatively smoothly as GNU members work to thrash out an agreement.
Many economists and investors will be watching with keen interest to see how Godongwana addresses the funding hole. Initially opting for a VAT increase – an unpopular measure but one with the potential to start rapidly generating cash flow – suggests the government is worried about its debt burden (at an all-time high debt-to-GDP ratio above 72%) and deficit.
None of the alternatives – higher borrowing, more austerity, or increasing corporate or personal income taxes – seem likely to completely address the shortfall. The best option – reigniting growth through economic reforms – will take a while to bear fruit. As such, a grim fiscal picture will weigh on the country’s outlook for the foreseeable future.
While most analysts believe that unity will ultimately prevail over a revised budget, the dispute between members of the GNU also highlights that political risk hasn’t dissipated in South Africa. While we maintain that the GNU was the optimal outcome for the 2024 elections, we remain cautious about how quickly the GNU can turn the country around.
Mild reactions from bond markets and the JSE – and a shortfall and quick bounce-back for the rand – suggest markets have shrugged off the postponement of the budget speech for now. It is perhaps just a growing pain for a country becoming used to coalition government: but the GNU will face far tougher tests in the months ahead.
“The tension in the GNU has been building for a while about the ANC’s lack of discussion with the other parties and just continuing on their previous path. This unfortunate event is just a growing pain of a new era of power-sharing politics, and by no means a crisis.”?
– Maarten Ackerman, Chief Economist at Citadel Investment Services
“Politics, and various economic and other policies of political parties, have become noisy around the world, not just in South Africa. We expect markets will continue digesting the implications of the delay in South Africa’s budget but not see this as the GNU falling apart.”?
– Annabel Bishop, Chief Economist at Investec
Global News
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Local News
- For the first time in South Africa’s democratic history, Parliament postponed the National Budget on Wednesday after a day of intense political manoeuvring. Cabinet members of the GNU resisted Finance Minister Enoch Godongwana’s proposal to raise VAT from 15% to 17% to fund increased spending on essential services. Following a series of high-level meetings – including a 7 a.m. discussion between President Cyril Ramaphosa and GNU party leaders, and a tense Cabinet debate – it was decided to delay the budget until 12 March.
- South Africa’s rand and stocks dropped following the delay of the National Budget, sparking concerns about the stability of the coalition government that has been in power since last May’s elections. The FTSE/JSE All Share Index fell by as much as 0.8% before recovering some losses, with general retailers leading the downturn. The rand weakened by 0.9% to R18.57/USD by 4:05 p.m. on Wednesday but was trading at R18.35/USD as at the time of writing.
- Business leaders have warned that the government’s credibility is at risk after the shock decision to postpone the tabling of the budget. This is according to Business Leadership South Africa and Business Unity South Africa. Professor Andre Thomashausen, an international law expert from the University of South Africa, said that if a budget cannot be agreed upon due to escalating public spending, the country could see another drop in GDP, compounding losses since 2000. He criticised ideological rigidity for making key concessions non-negotiable. In contrast, Hendrik du Toit, founder and CEO of Ninety One, viewed the last-minute budget delay as a sign of democracy in action.
- BusinessLIVE’s editorial following the postponement described Ramaphosa as a leader in disarray. However, BusinessLIVE editor-at-large Peter Bruce argued that the DA’s resistance to ANC leaders making unilateral decisions demonstrates democracy at work. Patriotic Alliance leader Gayton McKenzie echoed this view, saying the move highlights how the GNU can collaborate and push back against one-sided decision-making.
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- Reserve Bank Governor Lesetja Kganyago stated that a VAT increase from 15% to 17% would disrupt the bank’s inflation forecast, but it would only take action if this led to a second round of price increases, which would occur much later. In the delayed Budget Speech, inflation was projected at 4.5% for 2025, while National Treasury revised its 2024 economic growth forecast down from 1.1% to 0.8%, citing weaker agricultural and transport performance in the third quarter. S&P Global warned that the central bank might slow the pace of interest rate cuts this year and into 2026 due to shifts in US policy.
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- Declining thermal coal prices and costly operational impairments resulted in Switzerland-based diversified metals miner Glencore posting a net loss of nearly R30 billion for the year to end-December. Despite an improved rail performance supporting stronger exports from the Richards Bay coal terminal, a reduction in trucking volumes saw Glencore’s overall local coal exports decrease 5% last year. In addition, thermal coal and gas prices fell markedly last year as global energy markets continued to normalise from the supply disruptions caused by geopolitical conflict in 2022 and 2023.
- As at the time of writing, the rand was flat against the dollar and the ALSI was 0.35% up for the week.
Sources: Dynasty, Business Report, BusinessLIVE, Reuters, New York Times, Moneyweb, Wall Street Journal, TechCentral, News24, Bloomberg,?etc.
