Complete madness in South Africa

Krutham managing director Peter Attard Montalto said the budget speech debacle is a wake-up call to everyone in South Africa and a pathway to higher primary surpluses.

Finance Minister Enoch Godongwana was set to deliver his 2025 Budget Speech on Wednesday, 19 February 2025, in the National Assembly.

However, for the first time in democratic South Africa, the budget speech was cancelled to accommodate further deliberations within the Government of National Unity (GNU).

The main sticking point was the planned two percentage point increase in value-added tax, which many cabinet ministers opposed.

DA leader John Steenhuisen said the postponement of the Budget Speech was a victory for the people of South Africa because it prevented a 2pp VAT increase.

He said the DA would now help introduce a new budget anchored in growing the economy rather than increasing taxes or debt.

Patriotic Alliance leader and Minister of Sport Gayton McKenzie said the majority of cabinet members were against the budget.

“It was us listening to each other without party political heads. The Finance Minister graciously took note of everything that was said,” McKenzie said.

The Finance Minister said the budget must “strike a balance between the interests of the public, economic growth and financial sustainability”.

He noted that the budget must be tabled before the start of the new financial year, but the law does make provision for exceptional circumstances.

The cancellation caused chaos among the media and economists who planned their week around the 2025 budget.

Later on Wednesday, the National Treasury announced that the 2025/26 annual budget will be tabled on 12 March 2025.

It added that National Treasury officials would not be providing comments or responding to queries related to the budget documents.

The budget debacle caused the financial markets to contract, and the rand weakened significantly on Wednesday afternoon.

Attard Montalto said it was a wake-up call to everyone, but the pathway to higher primary surpluses is intact through the self-induced madness. “In the end, that is all that matters,” he said.

Godongwana rolled the political dice and lost

Attard Montalto said Godongwana rolled the political dice and lost. “He should have known the 2% VAT increase was never viable,” he said.

He argued that the ANC and the ANC elements of the cabinet, more broadly, were largely on autopilot or asleep to the risks.

The more profound question is why the Minister and President waited so late in the day before addressing the problem.

The National Treasury was briefing people in lockup on a VAT increase whilst the cabinet was simultaneously blocking it.

“It shows worrying and severe governance failures and internal ANC political failures within the cabinet system,” Attard Montalto argued.

“These have been there for some time but not exposed due to the prior single-party nature of government. This is what really matters here.”

Attard Montalto said this is an opportunity for something good if GNU processes can be strengthened and the ANC sees the DA threat of red lines as more credible.

He does not see a risk to GNU stability from this debacle, given that a budget without VAT must be presented and that there are limited choices.

The Finance Minister’s position also seems safe. “We think the President will refuse to allow him to resign because of the lack of alternatives and its mid-G20,” he said.

“The President has refused Godongwana before on at least two occasions from stepping back before and after he became Finance Minister.”

Attard Montalto said the 2025 budget should never have gotten this far. “We understand it did despite numerous times the Minister was told it wasn’t viable.”

“Budgets can and do change a remarkable amount in the two weeks before as they complete political processes. This is quite normal, but never this late,” he said.

“We understand that the Minister has generally been disengaged, as he was at the MTBPS process until recently. Clearly, that did not help either.”

The VAT question

Attard Montalto said the 2025 Budget that wasn’t tabled had a strong and conservative fiscal thread through it.

The full documentation showed that the National Treasury is keeping the fiscal path clear, with a rapidly rising primary surplus and peaking debt next year.

However, with a 2pp VAT increase off the table, it will be difficult to raise an additional R60 billion from other taxes.

“There is no room whatsoever from any side for any compromise that involves VAT. This leaves a R60 billion hole each year,” he said.

Some tax changes to raise additional revenue are possible, but there is no lever as big as value-added tax (VAT).

The fuel levy freeze could be removed, and more excise duties on alcoholic beverages and tobacco could be applied.

“The planned zero-rating VAT basket expansion could be removed though one wonders if this genie is out of the bottle now,” he said.

These interventions would raise only around R8 billion per year, which is very far from the needed R60 billion.

Reserves in the budget could be narrowed, and the primary path could be shifted from outperforming the MTBPS to being in line with the MTBPS, saving R12.3 billion next year.

“All this perhaps means that the real hole is about half—R30 billion—next year. This is still large, and so requires real additional spending cuts,” he said.

Attard Montalto warned against pushing down the old ‘anonymous’ top trimming to provinces and municipalities. “It will just cause more falling over and stress at the sub-national level.”

Cutting infrastructure is easy but bad for growth and bad for the policy framework of supporting reform and private sector participation.

He said there is limited room to manoeuvre, except expenditure cuts taking the bulk of the strain to cover that ‘real’ R30 billion hole.