South Africa’s finance minister, Enoch Godongwana, is set to make a second attempt at presenting an acceptable budget to a fractious coalition government. The stakes are high, as failure to pass the budget could undermine investor confidence and stall much-needed economic reforms. The question on everyone’s mind: Can the Government of National Unity (GNU) find common ground?
The Budget Delay and Its Implications
Last month, Godongwana’s initial budget proposal was rejected by key coalition partners, including the Democratic Alliance (DA), marking the first budget postponement in at least three decades. The sticking point was a proposed two-percentage-point increase in the value-added tax (VAT) rate, which would have raised R60 billion ($3.3 billion) to address fiscal shortfalls.
The delay has already impacted South Africa’s bond yield curve, with long-term yields rising due to concerns over government borrowing and fiscal stability. Investors are closely watching the GNU’s ability to navigate this crisis, as further disruptions could signal deeper governance issues.
“Investors are at this stage very focused on the durability and efficacy of the government of national unity,” said Elna Moolman, head of South Africa macroeconomic research at Standard Bank Group. “Any further disruptions to the budget process would reduce their expectations in terms of growth and fiscal reforms.”
The Search for Compromise
Since the postponement, negotiations have focused on finding a compromise that balances revenue generation with spending priorities. One likely solution is a smaller VAT increase of 0.5 to 1 percentage point, coupled with more moderate spending adjustments. Andrew Matheny, an economist at Goldman Sachs Group Inc., noted that a full R60 billion spending plan is unlikely to pass, and spending cuts will likely be part of the compromise.
The DA, the second-largest party in the GNU, has set clear conditions for its support. Party leader John Steenhuisen emphasized the need for pro-growth reforms, such as the concessioning of the Cape Town port, firm deadlines to remove structural bottlenecks, and thorough spending reviews. If these demands aren’t met, the DA may withhold its support, forcing the coalition to seek votes from smaller parties outside the alliance.
Coalition Tensions and Spending Priorities
The GNU, formed after the African National Congress (ANC) lost its outright majority in 2023, has made the budgeting process more complex. Unlike previous years, when the ANC could make decisions unilaterally, the coalition requires cross-party consultation, leading to prolonged negotiations and compromises.
While there is broad consensus on the need for fiscal consolidation, coalition members disagree on how to achieve it. The DA advocates for deeper spending cuts, while Godongwana warns that such measures could harm critical government services, especially with local-government elections looming in 2026.
“The silver lining here is that there’s actually quite a bit of consensus on the need for fiscal consolidation across the main parties within the GNU,” Matheny said. “The disagreement is on how to get there.”
Alternative Revenue Measures
In addition to a potential VAT hike, the Treasury is considering other revenue-raising measures, such as increasing the fuel levy and taxes on alcohol and tobacco products. Another option is pausing pension fund contributions for state workers, though this could face significant pushback. Borrowing more to cover the shortfall is also on the table, but it would risk derailing the government’s debt-stabilization targets.
The draft budget projected that debt would peak in 2025-26 at 76.1% of GDP, slightly higher than previous estimates. Economists surveyed by Bloomberg expect debt to peak at 76.5% of GDP, underscoring the urgency of fiscal discipline.
What’s Next?
Parliament is expected to vote on the revised budget in May, though portions of it will be debated earlier. Mpho Molopyane, chief economist at Alexforbes, believes the budget will reflect the coalition’s commitment to building a capable state and promoting economic growth. However, she cautioned that some expenditure commitments from the postponed budget may need to be scaled back.
As South Africa navigates this budget crisis, the GNU’s ability to find common ground will be a critical test of its effectiveness. For now, the nation watches and waits, hoping for a resolution that balances fiscal responsibility with the need to support economic recovery and growth.
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