HILARY JOFFE: Tax compromise kicks the can right out of neighbourhood

We’ve often in the past said that national budgets kick the can down the road as they delay inevitable spending decisions or budget for better times and better taxes in the hope of these  materialising.

But the budget finance minister Enoch Godongwana finally managed to table on Wednesday didn’t just kick the can down the road. It kicked it right out of the neighbourhood, pinning its prospects in parliament on political negotiations that go well beyond the minister’s pay grade, as he put it.

After two weeks of tense talks, the DA agreed to the tabling of a budget with two successive 50 basis-point  VAT hikes, on condition that President Cyril Ramaphosa takes steps to address the party’s concern about controversial pieces of legislation he signed recently — on basic education, expropriation and national health insurance.

That is what a rather cheerful Godongwana told journalists before the budget speech he was expected, at last, to deliver on Wednesday afternoon. This gave the budget a status unlike  those of previous years. As the minister and his officials quipped, it was a version of the budget, one of five scenarios they offered the cabinet in recent weeks.

It is a milder version of the tax-and-spend budget that a divided cabinet would not allow to be tabled on February 19. This is the version that will increase the VAT rate from 15% to 16% over two years, along with increasing personal taxes to help fund R142bn net of additional spending, much of it on front-line services and infrastructure. That replaces the February version that proposed a net R173bn of additional spending with VAT hiked to 17%.

The minister’s cheer was in part because he succeeded at least in tabling a version. He seems genuinely pleased too that his government colleagues are finally engaging seriously with the trade-offs involved in crafting a budget. He seems to have taken on board that the government of national unity (GNU) requires a new approach to the budget.

What will come out in the end depends not only on those nonbudget negotiations but on the long process parliament is about to embark on as its committees scrutinise budget details.

Even assuming parliament endorses the budget in the end, it may — for the first time since democracy — be quite unlike the one tabled on Wednesday. And the process by which it gets there will be forever changed by SA’s delayed budget drama. All of this makes it hard to ask whether this was a good budget version. But markets will be pricing SA’s debt and its currency in response to the numbers, as well as to the politics.

A good budget, for the markets, is one that delivers what government has long promised — that it will stabilise and over time reduce the public debt burden, which jumped from 25% to 75% of the size of the economy in only 15 years, with interest costs now consuming almost 22% of tax revenue, more than government spends on health or basic education.

In that sense this version was OK. It reflected some compromises on taxing, without too many on spending. It trimmed here, tweaked there, and managed to come up with a proposed framework that sees the public debt stabilise in the coming 2025/26 fiscal year before coming down as promised, even if at 76.2% the peak is a touch higher than in February and quite a lot higher than last February’s 75.5% projection.

But a good, or even just an OK budget for the markets, is also one that’s credible. And there are at least two reasons why the minister and his team might struggle to get the markets to believe this week’s budget. Contested politics is one. The numbers themselves are another.

The revenue and ratios projected in the budget depend heavily on the outlook for economic growth the Treasury pencils in. One of the big credibility problems in the past was that it relied on overoptimistic growth and revenue forecasts that didn’t materialise. It has been more sober in recent years. But this time its growth forecasts look questionable right upfront, because they are based on official GDP numbers that have already been overtaken.

Stats SA published the fourth quarter GDP numbers on March 4, showing an economy that grew by a worse-than-expected 0.6% in 2024. The Treasury still has 0.8%. It’s made no revisions to its February 19 assumptions — 1.9% for this year and an average 1.8% over the medium term — even though most economists have been busily revising down their forecasts since  the Stats SA release.

Treasury budget head Edgar Sishi points out that the national budget generally is crafted using the third quarter GDP numbers. But the market will be taking a close and critical look at his revenue and ratio projections. That’s particularly so because the Treasury has upped its revenue estimates by almost R12bn since February 19 despite poorer than expected economic indicators. That’s helped reduce the effect of the smaller VAT hike. So too has the fact that this time it will rake in an extra R19.5bn from individual taxpayers by giving zero relief for fiscal drag, and no inflation adjustment on medical tax credits. Middle-income earners will be hit hard, just as they will be by the VAT increase — three-quarters of VAT is paid by those earning more than R118,000 a year.

This is one area where the GNU partners will surely have had an education in those budget trade-offs. Spending is another: the biggest spending cut compared with February 19's is a R15bn reduction in inflation-linked increases in social grants. The Treasury justified this on the basis that a lower VAT increase required less cushioning for the poor, though it’s not clear social grants have kept up with inflation in recent years.

This week’s budget was a compromise. But it’s still an about turn on fiscal policy compared to the budget of a year ago which pencilled in 0.5% average real spending cuts in the medium term.  This one pencils in average real increases of 0.8%, down from 0.9% on February 19. So the minister has his tax-and-spend budget, for now. Better still, after the Treasury has conducted 240 spending reviews to little or no effect, presumably for lack of political authority or will, this time Ramaphosa will establish a joint committee to identify wasteful, inefficient and underperforming programmes. He might, perhaps, even act on its findings.

Putting the public finances on a more sustainable path requires bold action to tackle spending on things the government shouldn’t be wasting taxpayers’ money on, just as it requires more effective tax collection and faster reforms to drive faster economic growth. It may be messy, but if the budget drama helps push SA in that direction, democracy will be the winner.

• Joffe is editor-at-large.