South Africa's economic landscape shifts with Finance Minister's third budget plan

Finance Minister Enoch Godongwana could be preparing for an unprecedented third budget speech after the reversal of a 0.5 percentage points increase in value-added tax (VAT) last week.

This comes as Godongwana on Wednesday will host a media briefing to explain the technical process that must now be undertaken regarding the 2025 Budget. 

This decision follows a court challenge brought forward by the Democratic Alliance and the Economic Freedom Fighters regarding the proposed VAT hike in the 2025 Budget.

The Western Cape High Court ratified an agreement reached out of court on April 27, allowing Godongwana to rescind the increase, which was initially set to take effect on May 1.

Waldo Krugell, an economics professor at the North-West University, said that the Treasury now has to prepare a third budget, the date of which is still to be announced.

"In practical terms, we have the Medium Term Budget Policy Statement (MTBPS), so there is no danger of a government shutdown. Though politicians are shouting, they will not play a big role in getting to new numbers," Krugell said.

"The work will be done by the Treasury's Budget Office. Economists are keen to see the impact of updated economic growth forecasts and what they mean for tax income and major ratios like debt-to-GDP."

Krugell added that Godongwana has also indicated that borrowing more will not be an option, so there will have to be some spending cuts to the proposals made in Budget 2.0.

Godongwana acknowledged that the attempt to increase the VAT lacked political backing, evidenced by a letter from the Speaker on April 21.

Despite seeing the VAT increase as a less harmful option for economic growth and employment compared to other alternatives, the unique political landscape has forced a reconsideration of fiscal strategies.

With the withdrawal of the VAT increase, the National Treasury anticipates a revenue shortfall of approximately R75 billion, necessitating cuts in government expenditure that could significantly affect public service delivery.

North-West University Business School economist, Professor Raymond Parsons, on Tuesday described the current scenario as a case of "back to the drawing board".

Parsons said that overall, to now reset the fiscal arithmetic for a new Budget offered a great opportunity to get an agreed fiscal deal in Parliament within a more realistic economic framework.

"The Treasury, relevant Parliamentary Committees, and economists all now have to redo their fiscal homework on several key changed economic and fiscal variables," Parsons said.

"One major variable that has recently changed is the original assumption of a 1.9% GDP growth underpinning previous Budget revenue projections. Both global and domestic economic factors suggest this is now too optimistic.”

Siyabonga Ntombela, University of KwaZulu-Natal academic and political analyst, warned that the government will attempt to recoup the lost revenue through alternative measures, such as increasing the fuel levy, which will in turn impact food prices.

"Certain goods will all of a sudden cost more. South Africa's borrowing ratings are below investment grade. The government will have to put some austerity measures to keep the country afloat," Ntombela said.

The impending third budget, whose date has yet to be announced, brings with it a sense of urgency across economic sectors.

Efficient Group Chief Economist Dawie Roodt highlighted that the reversal of VAT signaled a broader need to overhaul the entire budget.

"I hope that it won’t take long as they have finalised other areas of the Budget. However, the situation is concerning. We have a Government of National Unity (GNU) and they can’t come to an agreement on a budget. This is not a good reflection of our government," Roodt said.

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