South Africa’s tough 2025 budget plan

South Africa is facing unprecedented challenges as the 2025 Budget Speech has been postponed for the first time in the country's democratic history. The disagreements within the Government of National Unity have put immense pressure on the government to deliver a credible economic plan with the upcoming Budget 2.0. Annabel Bishop, the Chief Economist at Investec, sheds light on the critical considerations for tomorrow's budget speech. One of the central issues surrounding this year's budget speech is the potential increase in Value Added Tax (VAT). While a VAT hike can generate significant revenue, the 2% increase proposed can have adverse effects on the economy. Bishop highlights that substantial tax hikes could lead to slower economic growth, especially in a period where South Africa is already grappling with weak economic performance. Exploring alternatives, Bishop suggests that cutting expenditure could be a viable option to reduce the necessity for a significant VAT hike, emphasizing the importance of examining why such measures are needed. The debate around introducing wealth taxes or property taxes as alternative revenue sources has also emerged. However, Bishop points out the challenges associated with further taxing individuals who are already paying high rates compared to international standards. Instead, she advocates for a focus on curbing non-critical government expenditure, such as excessive civil servant salaries and luxury expenses, to reduce the financial burden on the state. In the context of the Government of National Unity's alignment on critical issues like the VAT hike, Bishop acknowledges the ongoing disagreements but emphasizes the necessity of presenting the budget to ensure the government's operational continuity from the coming fiscal year. While delays raise concerns, the urgency to have a budget in place overrides the risks associated with further postponements. Looking at the potential impact of a second budget postponement on investor sentiment, Bishop notes that the market response to the first postponement was relatively minor. However, she underscores the importance of avoiding high borrowing costs and highlights the significance of stronger economic growth to boost revenue collection. Bishop emphasizes the need for an efficient revenue collection service, citing SARS's potential to collect up to 800 billion in unpaid taxes, which could negate the need for a VAT hike and lead to tax cuts. Delving into policy measures to enhance GDP growth in the short to medium term, Bishop mentions the critical role of infrastructure development. Highlighting past economic growth spurts resulting from tax cuts and enhanced revenue collection, she stresses the importance of addressing infrastructure shortcomings to stimulate economic activity. While immediate growth acceleration may not be feasible, investing in infrastructure and resolving supply constraints can pave the way for sustained economic expansion. Regarding the sustainability of social grant spending, Bishop emphasizes that fiscal discipline is crucial to uphold social welfare commitments. By maintaining sustainable government finances and avoiding overborrowing, South Africa can ensure continued support for social welfare programs without risking financial instability. She calls for expenditure cuts in non-essential areas to maintain a balanced budget while safeguarding social welfare provisions. As South Africa braces for the pivotal budget speech, the nation's economic future hangs in the balance. The decisions made in the upcoming budget will have far-reaching implications for the country's fiscal health, economic growth, and social welfare programs. Stakeholders eagerly await the unveiling of Budget 2.0 to gauge the government's strategy in navigating the complex economic landscape.