OSAGYEFO MAZWAI: The budget impasse could have been avoided

The decision by the Western Cape High Court to halt the 0.5 percentage point increase in VAT will be a welcome relief for SA consumers, who were about to be even more economically constrained due to both the sales tax increase and bracket creep in a high real interest rate environment.

Ahead of the court decision and the announcement by finance minister Enoch Godongwana that the VAT increase would not be implemented, there was broad-based opposition to the increase across political parties and in most of the public submissions that were made to the standing committee on finance.

The will of the people is the cornerstone of any democracy and the apparent disregard for the societal opposition to the increase in VAT is at odds with SA’s democratic principles. This is not to suggest that parliamentarians should adopt populist policies, but to point out that there was overwhelming evidence that a VAT hike was not necessary. The government should also not succumb to public pressure when the evidence before it is that the policy is not in the public interest. 

Before the presentation of the fiscal framework incoming data was not supportive of a VAT hike, chief of which was robust tax data. The approval of the fiscal framework in parliament was a lost opportunity for parliamentarians to put the interests of the people at the centre of policymaking.

The National Treasury and parliament will have to go back to the fiscal framework drawing board, something that could have started weeks ago, instead of adopting it only to rescind it later.

The minister will represent the Appropriation Bill and Division of Revenue Bill in the coming weeks. In essence, the country is back to square one and arguments that the approval of the framework was intended to maintain national stability are of little substance.

This implies that squabbles within the government of national unity (GNU) and the instability that followed could have been avoided since there is no VAT increase, which was the initial suggestion. As the budget impasse ensued, the stability and continuity of the GNU came under question, and the markets and rand took a hit due to the resurgence of presumed political instability and policy uncertainty in SA.

That said, we acknowledge that most of the pressure on the rand and the market was due to tariff announcements by the Trump administration, but these pressures could have been less at the margin. The significance of the point is that the performance of markets and the rand in the second half of 2024 were a testament of the confidence that was built around the GNU and the assumed commitment to structural reform, inclusive economic growth, the strength of institutions and the rule of law. What has happened recently shows how vulnerable SA is to self-inflicted wounds.

The performance of the rand is the first concern given its influence on imported inflation. March headline inflation came out at 2.7%, well below the central bank target range and the lowest reading since 2020. It remains to be seen if inflation will stay that low given the recent shocks to the currency.

Current Brent crude prices should help keep inflation down, but the point is that the risks to the inflation outlook are not only external shocks, but internal shocks too. This suggests that the SA Reserve Bank may remain cautious and is likely to be reluctant to meaningfully cut interest rates to support the economy at a time when SA needs monetary policy support.

We need to avoid self-inflicted harm at all costs and steer towards internal support, particularly as the IMF recently revised SA’s growth outlook for 2025 to 1%. This is starkly different from expectations by the Treasury of 1.9%. Should the 1% growth expected by the IMF materialise, the budget impasse in 2026 will be far harsher and more detrimental than the current one. Most financial institutions in SA see growth of 1.3%-1.6%. This implies that there is a sizeable risk the Treasury will miss this year’s revenue forecast.

The performance of the market is also important due to wealth effects and how they affect consumption expenditure potential. While the percentage of the population exposed to financial market performance is relatively low, the reality is that those exposed (middle- and high-income households) will find it increasingly difficult to access funding using financial assets as a form of collateral.

This is compounded by elevated interest rates, which make the cost of borrowing and accessing credit expensive. In an environment of decreasing wealth, banks are likely to tighten lending standards, making it more difficult for households and businesses to borrow. 

SA can little afford to have another weak economic growth outcome. The budget impasse ought to have been avoided now that the SA Revenue Service (Sars) collected higher than expected tax revenues, and this was not a surprise given the expected effect of the two-pot withdrawals. Increased allocations to Sars operations are likely to support more robust collections going forward, but even so, self-inflicted wounds are not helpful.

More events, such as those seen of late in the GNU, are likely to continue to be unhelpful and we need to recognise how vulnerable SA is to perception and confidence. Business confidence recently stagnated while consumer confidence plummeted. Consumers are critical for the SA economy and the environment needs to be conducive for consumer spending.

The main questions consumers are likely to ask are: will I remain employed, promoted or fired, or will I even get an employment opportunity? Will inflation remain low, and will interest rates be low enough for me to access debt affordably to afford a house or car?

Continued fragility in the GNU would be unhelpful in inspiring confidence, and weaker markets and a depreciated rand would be negative for society in general. The interests of the people need to be at the centre of economic policymaking. 

• Mazwai is an investment strategist at Investec Wealth & Investment International.