21 February 2025 | 12:32 CAT
3-minute read

Unprecedented budget delay raises concerns over government spending

The South African government’s unexpected decision to postpone its budget announcement at the last minute has sparked widespread concern over fiscal management and political cohesion within the governing coalition.

Speaking on the ASRI Report on Sabaahul Muslim, economic analyst Rashaad Amra described the delay as “completely unprecedented,” highlighting that this is the first time in South Africa’s democratic history that such a postponement has occurred. The delay was reportedly driven by a major disagreement within the cabinet, particularly over a proposed two-percentage-point increase in value-added tax (VAT), which was only revealed to some ministers in the weeks leading up to the budget announcement.

Coalition government tensions

Historically, South Africa’s Treasury has operated under a strong finance minister, with budget decisions being made in consultation with the Minister’s Committee on the Budget. However, with the country now governed by a coalition, decision-making has become more complex. Reports indicate that the Democratic Alliance (DA) and even some ANC ministers objected to the VAT proposal, leading to the postponement.

Despite the delay, Amra assured that government operations would not come to a halt. The Public Finance Management Act allows departments to continue spending for several months into the new financial year, preventing an immediate crisis in public services such as education and healthcare. However, the political fallout and the uncertainty surrounding the budget’s future remain significant concerns.

The VAT controversy and fiscal dilemma

The proposed VAT increase was intended to address growing expenditure pressures, particularly in health, education, and social grants. The DA and other opposition parties, while advocating for increased spending in these sectors, have strongly opposed raising VAT as a means of funding these commitments. The ANC itself has also faced internal divisions on the issue.

Amra noted that VAT is often considered a regressive tax, impacting lower- and middle-income households the most. While the Treasury had proposed expanding the list of zero-rated essential goods to mitigate the burden on the poor, the backlash against the increase was overwhelming. The last VAT hike, from 14% to 15%, was met with significant resistance, making a further two-percentage-point jump even more contentious.

Years of poor economic growth and rising debt

South Africa’s fiscal challenges are deeply rooted in years of slow economic growth and rising debt. Since the 2008 global financial crisis, the country has struggled to boost revenue collection while simultaneously managing costly bailouts of state-owned enterprises like Eskom and Transnet. The growing demand for social grants and public services has further strained the budget, leaving the government with limited options—either increase taxes or take on more debt.

Amra emphasised that while South Africa’s government has made significant strides in supporting the poor through social grants, public healthcare, and education, the gap between revenue and expenditure has continued to widen. The government had planned to increase spending by R252 billion over the next three years, with R108 billion allocated for the upcoming financial year. The postponed budget was expected to outline how this would be funded, primarily through the controversial VAT increase.

What happens next?

With VAT seemingly off the table, the government faces a difficult choice—find alternative revenue sources or cut essential services. Key funding needs include education, healthcare, social relief grants, and peacekeeping efforts in the Democratic Republic of Congo, all of which require significant financial resources.

The Treasury now finds itself in a precarious position, needing to negotiate a consensus-driven approach within the coalition government. The failure to pass the budget on time has also raised questions about whether South Africa’s decision-making processes remain viable under the current political structure.

As the government returns to the drawing board, the next few weeks will be critical in determining how South Africa navigates its fiscal challenges and whether a sustainable compromise can be reached.

Listen to the ASRI Report on Sabaahul Muslim with Moulana Sulaimaan Ravat.