The efficacy of spending is not simply a good idea, but a strategic pathway for answering the growth question.
The decision to postpone the delivery of the 2025 budget by cabinet on the 19th of February 2025 to the 12th of March 2025, was not only a reminder that South Africa is governed through coalition government dynamics in the GNU. It was also a reminder of the complex fiscal policy choices that confronts its 31-year-old democracy.
In a world where some of the leading economies are governed through coalition arrangements, the postponement of the budget signals a new era. While this unprecedented delay may suggest a crisis or strain within the cabinet, it can also be seen as a sign of South Africa’s maturing democracy—an opportunity to elevate the quality of discourse around fiscal policy choices and broader economic strategies.
The initial tax proposal to increase value added tax (VAT) from 15% to 17%, to a revised 0.5% in 2025/26 and another 0.5% in 2026/27, in order to finance key priorities such as expanding the headcount of front facing public servants in health, education and other essential services. Thus, raising R28 billion in additional revenue in 2025/26 and R14.5 billion in 2026/27 respectively.
The socioeconomic determinants that inform SA’s fiscal policy are reflected in the policy framework. The elevated levels of unemployment, inequality and poverty are binding constraints to the country’s long-term prospects. In responses to this, on the expenditure side, the growth in government spending has been more pronounced in areas such as social development, education and healthcare. The unintended consequence, in the advent of limited resources, areas such as general public services and economic development have taken somewhat of a backseat. In the period, 2024/25 to 2026/27 the net increase for social development and education is R47.1 billion and R11.2 billion respectively. In comparison to R23.8 billion for economic development. Which is an improvement from the 2024/25 budget.
It goes without saying that all of these spending priorities are indeed important. Whilst acknowledging this reality, bold steps need to be taken to unlock economic growth because the reduction in important fiscal ratios such as the debt-to-GDP and spending allocations are a function of economic growth.
From a sustainability point of view, economic development activity is important in order to grow the economy and broaden the tax base. This would improve the pool of available resources. The additional R3.5 billion allocation to the collector of revenue is another important step to increase tax compliance. This is important as it will strengthen SA’s efforts in relation to illicit financial flows and the risk areas identified by the Financial Action Task Force (FATF) Greylist. Wherein, significant progress has been made thus far. The effect of this, will be realized in lower borrowing costs in the bond markets.
The efficacy of government spending, in this context, is crucial. Government will soon publish the Medium-Term Development Plan (MTDP), which forecasts a 3% GDP growth over the next 5 years, provided that specific interventions are implemented effectively. The factors that should anchor such a plan, over the next 5 years ought to be complimented by the budget are:
- The extent to which there is improvement in the efficacy of government spending.
- The optimal tax rates for SA given the prevailing macroeconomic condition and forecast period.
- The extent to which SA’s fiscal and industrial policy conditions are able to attract further foreign direct investment to bridge the additional 15% of GDP fixed investment required to increase GDP growth to 5% and flatten unemployment and reduce poverty.
We should anticipate a heightened debate regarding the proposed budget for 2025/26 in light of the proposed VAT adjustments and reduced collections from corporate taxes. More importantly, the unseen cost of a lack of good governance in some organs of state should receive more attention and preconditions may have to be considered, followed up on and reported on effectively to prevent leakages in the system. In the event that this foundation is set, the growth question for SA will be answered.
