ANN BERNSTEIN: Runaway spending, not VAT, is the real budget problem

To break the deadlock over the budget, the National Treasury has reportedly proposed a smaller VAT increase instead of the initially planned hike of two percentage points. However, this “compromise” does not deal with SA’s fiscal crisis and wastes the opportunity provided by the budget debacle.

The real budget issue is not VAT — it is the government’s inability to control spending and use tax revenue efficiently. We sit today with a R190bn hole in the three-year medium-term expenditure framework (MTEF) precisely because of reckless economic policy resulting in a country in deeper and deeper debt. 

We argue for a series of urgent reforms. These include proposals on how to reduce spending in the short term, funding the SA Revenue Service to find more money from tax evaders, opening new revenue streams that focus on reducing existing tax breaks for the better off, and introducing a compact — signed by all government of national unity (GNU) partners — to speed up fundamental reforms for growth.

We cannot borrow our way out of trouble. The rapid increase in government borrowing over the past 15 years is a major reason SA is stuck in a low-growth perma-crisis and has driven debt levels from less than 25% of GDP to more than 75%. 

Additional borrowing was used to finance higher salaries in the public service, introduce “free” higher education, roll out the social relief of distress grant, bail out state-owned enterprises (SOEs) and, increasingly, cover debt service costs — by far the fastest-growing spending item on the budget.And all of this at a time when economic growth was falling.

Raising taxes to address the rise in spending is undesirable. SA is already highly taxed, and the government’s credibility as a provider of basic services is catastrophically low. VAT and other tax hikes will lead to more tax avoidance and evasion, while the negative effect on growth will reduce the revenue the government can generate through any tax increases. 

In resolving the budget crisis, the emphasis therefore needs to be on reducing grossly inefficient government spending. Too many low-impact programmes on the budget absorb resources without delivering meaningful outcomes. Too many people in leadership positions cannot do their jobs or spend money effectively. Too many public servants do not (or cannot) do their jobs. Too many failing SOEs are run inefficiently and continue to fail because they expect to be bailed out. Above all, there is too much corruption and elite looting of the state.  

What could be done? 

The government should consider withdrawing from its recently agreed public service wage agreement (which provides for an above-inflation 5.5% increase in the first year) and implement a 3.5% increase instead. If it did this, and if wages grew at the consumer price index over the following two years, the government would save R100bn over the next three years, assuming personnel numbers are static. Even if an increase was provided to accommodate employing some additional doctors and teachers, savings of R60bn over the MTEF period would be possible.

Procurement policies that artificially inflate public sector purchasing costs should be changed. If the government stipulated that goods and services budgets would rise by 3.5% in each of the next three years — rather than the 5.4% pencilled into the rejected budget — it could realise savings of R50bn. These savings would not affect service delivery if combined with a reconsideration of localisation policies, which increase costs. For example, Eskom was recently allowed to contract directly with original equipment manufacturers to get power plants working more effectively, overriding localisation requirements. This experiment has been successful and should now be applied across the government.

The government should immediately commit to an urgent review of payrolls to identify and eliminate “ghost workers” who are drawing public sector salaries, with the results of the review tabled in parliament. There are other, more targeted, cuts that could be made, though not all of them could be effected immediately. These include shutting down the sector education and training authorities and the National Skills Fund (R80bn over three years); cutting state funding for small business in half; giving remaining funds to the private sector to manage; and closing that department. This would save R9bn — more if we include reducing staff implementing these programmes.  

Other low-impact programmes need urgently to be identified by a small multiparty cabinet subcommittee, which must motivate for, say, R40bn in cuts and defend them publicly. Cutting expenditure will not resolve the poly-crisis into which SA has fallen. At best, it will arrest the decline. What the GNU really has to do is get serious about growth. So far, the attitude of the GNU leadership seems to be that the mere existence of a coalition government amounts to a growth strategy. It does not.

Since June 2024 the Centre for Development and Enterprise (CDE) has outlined urgent actions that would send a strong signal that SA is serious about achieving growth, for example, the GNU must end cadre deployment, reduce the size of the cabinet and appoint competent professionals to senior leadership positions. Without these steps, reform efforts will be blocked by dysfunctional governance structures that have contributed to economic stagnation. 

A team led by business leaders should conduct a financial review of major SOEs, identifying opportunities for privatisation and asset sales. Revised public-private partnership regulations should allow private sector participation in SOE activities, increasing efficiency and reducing the state’s financial burden. A new, highly skilled department should be created to oversee these reforms and ensure boards are competent, independent and accountable. 

To root out corruption, the president should appoint a retired judge to assess performance, independence and leadership of the National Prosecuting Authority (NPA), respond to the request for a senior regional director to be suspended, and immediately ensure the NPA has full access to the Zondo commission archive. Special corruption courts should be established to fast-track cases and clear backlogs. 

To create a more competitive economy with more SA-based firms enabled to produce for global markets, the government must move away from protecting established, inefficient firms and instead promote productivity improvements and reduce the cost of doing business in SA. The motor vehicle industry’s extensive subsidies and incentives should be reviewed. The government should also immediately eliminate the extension of collective bargaining deals to non-parties, which harms small firms and adds to unemployment.

The GNU’s record in delivering growth-promoting reforms is disappointing. It needs urgently to start designing and implementing a plausible growth strategy, commencing with a few decisive actions such as those proposed by us. That should be a condition of passing the budget. Without urgent action, a failure to change tack will mean this is the first in a series of budget crises, which will become harder and harder to solve. 

A government that asks for more taxes while wasting billions on inefficiency and corruption is not credible. SA needs bold spending cuts and a clear, actionable growth strategy — not endless tax hikes and political compromises that fail to address the real problems. 

^• Bernstein is executive director of the Centre for Development and Enterprise. This piece draws from a new report, “Dealing with the Budget Crisis: CDE Recommendations”.