South Africa is out of money

Finance Minister Enoch Godongwana has hit South Africa with a bleak reality check: the tank is empty and we’re out of easy options.

The minister’s revised 2025 Budget—now excluding the VAT hike to 17%—was presented to Cabinet on Monday (25 February), with reports pointing to another wide rejection from members of the government of national unity (GNU).

According to “insiders” cited by News24 on Tuesday, the budget was called “unworkable”, with deep cuts to spending replacing the R60 billion-plus the proposed VAT hike sought to raise.

This is the unfortunate reality of the situation. If the government does not somehow raise money to fund its planned spending, then the only alternative is to cut spending.

A third option exists in turning to debt, but as many economists and business leaders have pointed out, this is something that should be avoided at all costs.

Old Mutual Group Chief Economist, Johann Els, said that, while tax increases are never ideal, the “bigger picture” of South Africa’s financial situation needs to be kept in mind.

Els said that in a fragile economy like South Africa, public finances need to be strengthened in a way that appeals to investors and credit rating agencies.

With the country’s current debt-to-GDP ratio hovering at around 75%, it needs firm steps to rein in deficits.

“This might not be pleasant in the short term but may be necessary for South Africa’s long-term economic prospects,” he said.

“If the government chooses not to raise VAT, we could see severe spending cuts that jeopardise critical areas like health, education, or social grants.

“One has to decide which route is ultimately the least damaging.”

The VAT hike, which would have seen a two-percentage point increase to VAT to 17%, was the proverbial straw that broke the camel’s back.

It became the fault line within the GNU that split the parties and led to the planned budget being shelved.

Els noted that the two percentage point hike would have hit consumers hard, but would have been mitigated by a host of other relief measures.

This included a higher-than-inflation increase in social grants, no fuel levy, and the extra zero-rating of meats and tinned vegetables, amongst others.

He also stressed that a higher VAT rate spreads the tax burden more widely—unlike targeted hikes in personal income tax.

Reports indicate that amid the latest impasse, talk of a wealth tax to cover the “no-VAT” budget shortfalls has once again cropped up.

But Els said that these targeted taxes could drive high-net-worth individuals to seek avoidance strategies or even leave the country.

Regardless, the government has to do something, and it sits in the unenviable position of having to make hard choices with no winners.

“If (revenue) doesn’t come from indirect taxes, it has to come from direct taxes or from cutting essential services, both of which could have deep social consequences,” Els said.

Government wasting money

Old Mutual Group Head of Financial Education, John Manyike, said that hiking taxes is simply a ‘stopgap’ that does not resolve the core issues with governance.

Systemic issues such as wasteful expenditure, poor service delivery at municipal level and weak accountability measures have undermined public trust in government’s fiscal management.

Unless govern,mnet’s tax measures are accompanied by more decisive reforms and prudent expenditure management, nothing will be resolved.

“Increasing VAT may bring short-term relief to the public purse, but it doesn’t solve the underlying problems of fruitless expenditure or corruption.

“We need to see stricter controls, better financial governance at local and national government level and a concerted effort to ensure taxpayer money is spent responsibly.

“Without that, consumers can feel like they’re being asked to pay more just to finance the same inefficiencies,” he said.

Manyike highlighted the poor culture of expenditure management at both the local and national level, citing the Auditor General reports which repeatedly find corruption and mismanaged budgets.

“If these systemic issues aren’t tackled, simply allocating more funds won’t fix the underlying problems. We risk perpetuating poor service delivery and further eroding trust.” he said.