The News
South African businesses are grappling with uncertainty around the government’s economic plans after the unprecedented postponement of the budget.
Finance Minister Enoch Godongwana on Wednesday delayed his budget speech until Mar. 12 after the Democratic Alliance, a main coalition partner with the African National Congress, opposed plans to increase value-added tax to 17%, from 15%. The government wants to spark growth in Africa’s most advanced economy without increasing borrowing — public debt is now 75% of GDP, compared to 27% in 2008 — but VAT has become a major sticking point.
The row marks the biggest policy disagreement since the ANC was forced into a coalition last year after losing its parliamentary majority for the first time since the end of apartheid in 1994.
With South Africa’s tax year set to start on Mar. 1, businesses lack finality around the government’s tax plans. “Uncertainty is something we can ill afford,” said Khulekani Mathe, CEO of the Business Unity South Africa organization, an employers’ group. He added that the delay casts doubt on the coalition’s “ability to collaborate effectively for the country’s benefit.”
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VAT, a consumption tax applied to goods and services, has only been increased once in 30 years in South Africa because it lacks support across the political spectrum.
The DA’s leader, John Steenhuisen, said the postponement “is a victory for the people of South Africa,” as it prevents the implementation of a tax hike “that would have broken the back of our economy.”
Godongwana was set to lay out his position in a prepared speech, which was officially abandoned around 15 minutes after his announcement was due to start. In the speech, which was released to the media and economists before the postponement, he was due to say: “Opting to take on more debt, when our credit rating is currently at junk status, would lead to even higher interest payments, ultimately reducing our future spending capacity and raising the risk of further rating downgrades.”
Sam’s view
A day of high drama marked the end of the coalition government’s honeymoon period, after months of being hailed as pro-business. It also signaled the real impact of the loss of the ANC’s parliamentary majority in last year’s election. The VAT dispute exposed disagreements within the ANC on how best to manage public finances and opened the way for parties like the DA to opportunistically claim victory for the rebellion.
In a flashpoint that’s symbolic of the discord at the top of government, the finance minister was unaware that microphones and cameras were still rolling after a press conference when he expressed his anger at Edward Kieswetter, national commissioner of the South African Revenue Service. Kieswetter made headlines on the morning of the budget, expressing opposition to the idea of increasing taxes.
The unprecedented budget delay signals a greater need for better communication and trust among the nine party leaders in the national unity government. Resistance to the budget proposal was a shock for the ANC, which ran the show for 30 years until it lost its majority last year. It also comes as South Africa hosts foreign and finance ministers from G20 countries as part of a year-long program where it serves as the rotating chair of the body of the world’s biggest economies.
Godongwana now needs to go back to the drawing board and prepare a budget that successfully navigates the charged coalition environment. It won’t help that he and the country’s chief tax collector don’t agree on tax increases.
Room for Disagreement
“The endurance of the government of national unity is not threatened by what happened when the budget could not be tabled on Wednesday,” said Standard Bank Chief Economist Goolam Ballim. He said corporates and financial markets participants were aware of the underlying patterns in South Africa’s fiscal framework and would appreciate the unfolding need for compromise and due regard in the coalition.
Notable
- Budgets are about confidence and the delay means “the last remaining genie of stability is out the bottle,” writes Stephen Grootes in the Daily Maverick.