South African politicians must take some difficult decisions over the next two weeks about Budget 3.0. The question is will they?
While National Treasury and the minister of finance are putting Budget 2025 3.0 together, they will face a difficult choice but should steer clear of increasing the country’s debt levels and rather cut expenditure.
When it comes to cutting expenses, we need a mature and honest assessment of what parts of government are delivering value to taxpayers and the political bravery to make the necessary decisions when they are not, Busisiwe Mavuso, CEO of Business Leadership South Africa, (BLSA), says.
“In the next two weeks, we will get our third budget this year. While it is good that our budget is subject to democratic interrogation, the government of national unity, as well as others in parliament, must show they have the political bravery to make decisions that will not please everyone.”
She states the obvious: “It is very important for the country that we get a budget that enables growth. “The reason this budget process has been so difficult is very mediocre economic growth. If we want to achieve sustainable public spending, we need growth that generates government revenue sustainably.”
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Trade war makes Budget 3.0 decisions even more difficult
Mavuso warns our politicians must make difficult choices, made more difficult due to numerous factors, including the trade wars that struck the world since February, when the outlook was better.
“Now our economic growth expectations have been dampened. This means that there will be less tax revenue available for government as businesses will be less profitable and consumers more subdued in spending. The situation we must budget for is now worse than it was two months ago.
“As I said before, if we do not want to compound the bleak economic outlook, it is vitally important that the budget does not increase debt levels. Treasury has worked hard to turn around the crisis that government finances were in five years ago.
“Ratings agencies noticed and improved the outlook for our credit rating. We must work toward regaining the investment-grade credit rating that we lost in 2020. Doing that will result in a lower cost of debt for government as well as the whole economy, providing a kicker for growth.”
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If Budget 3.0 brings more debt, government debt will cost more
However, she says, if we do the opposite and debt levels increase, we can expect investors will demand higher interest rates to buy the government’s debt, consuming more of our tax money and damaging economic growth.
“That means we have only two real choices: to increase taxes so that government raises more revenue to pay its bills, or to decrease expenses. Politically, the initial proposal by Treasury to increase VAT to raise more revenue has been roundly rejected. The choices are then to find other taxes to implement or expenses to cut.
“The difficulty for Treasury is that there really is not that much tax that can be raised other than through VAT. Some political parties have called for such tax increases, but personal income taxes and corporate taxes are already high by global standards. If they increase, people and companies will simply shift their economic activity out of the country.”
Treasury’s research has shown that we may end up collecting even less tax as a result, because businesses move out of the country, shedding jobs. Mavuso says there has also been some suggestion that the South African Revenue Service (Sars) should be pushed to collect more taxes through efficiency and collection improvements.
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Not prudent to base Budget 3.0 on improved tax collection
She says while Sars should aim to do this, it is not a prudent way to budget. “Those of us in business know that it is easy to budget to spend money, but much harder to budget to make money. Budgeting must be prudent, and relying on excess tax collections is not.”
Mavuso says the only way forward is to reduce expenditure to within our means. “That is always politically difficult because it means there will be losers. Understandably, no politician wants to be the one to say that government can no longer do something.
“But every year government sets up new projects and creates new spending lines. That is well and good, but it leads to a proliferation of entities, and not all of them deliver value for money. “
She says there is, of course, much else we can do to improve growth, and one of South Africa’s greatest strengths is the collaborative relationship between business and government. “I am looking forward to the next meeting between organised business and the president, due to take place this Friday.
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Business meeting with president this week
“We last met in January, in a very positive meeting that aligned us on structural reforms we needed to pursue. Much progress has been made on those, from improving the electricity system to logistics reforms, but the world has changed. That was before the US election and tariffs.
“At that meeting, we set a goal of delivering a 3% growth rate by the end of this year. As a result of global conditions, despite the progress made, that will now be difficult to achieve, but that is no reason to slow down – just the opposite.
“We must redouble our efforts to drive reforms to improve the performance of our economy, and global conditions just made the task more urgent. We must think carefully about how opportunities have shifted and ensure our partnership and plans are geared for the world as it now is.”
Mavuso says, as the budget situation shows, growth is critical for the country. “We must escape the low-growth trap we have been in for a decade and a half. Doing that will take brave and innovative thinking, especially in the new global environment we find ourselves in.”
