2025 budget: What economists are suggesting instead of raising taxes

Government is under pressure to curb state consumption spending and economists have come up with innovative ideas for Finance Minister Enoch Godongwana to rework the national budget he will present next month.

This is against the background of his botched plan to introduce a 2% value added tax (VAT) increase, leading to the postponement of the tabling of the budget in parliament.

‘Curb consumption’

Prof Raymond Parsons, of the North-West University Business School, said government’s emphasis should now be on “curbing state consumption spending – not infrastructure development”.

“In a revised budget, the priority should be on cutting fat, not muscle. With other tax and borrowing options now highly constrained, the main problem still lies on the spending side.

“The fiscal ‘gap’ of R58 billion in the current budget, which the VAT hike is intended to cover, primarily relates to ‘big ticket items’ like the public sector wage bill and bailouts to ailing state-owned enterprises (SOEs),” said Parsons.

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The budget postponement was “a great opportunity to get more consensus and credibility for fiscal policy by aligning public finances more closely with the government of national unity’s recent medium-term development plan’s (MTDP) overall goals”.

“The MTDP goals are a 3% economic growth rate, to promote job creation and facilitate a lower cost of living,” said Parsons.

As SA was in a low economic growth phase, he said, the proposed 2% VAT increase risked “pushing the economy into a negative ‘tax-and-spend’ cycle that would jeopardise broad socioeconomic goals. Getting the budget right on 12 March is a necessary but daunting task involving tough choices on what is now needed.

“The controversy about the tax burden in SA is symptomatic of economic growth that has been too low for too long – now limiting public financing options.

“While government of national unity (GNU) fiscal compromises will still be unavoidable in a revised budget, the more it promotes the goals of the MTDP, the more acceptable and credible it will be,” he added.

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University of Johannesburg economics lecturer Dr Frederich Kirsten said Godongwana and the GNU had limited options.

“Godongwana and the GNU face a tough job navigating the public trifecta of insufficient revenue, excessive expenditure and low chances of borrowing. Some options could include reducing wasteful spending – cutting travel costs in the GNU and reducing non-essential expenditure.

Economic growth

“However, the focus should be on economic growth initiatives – strengthening public-private partnerships (PPPs) to fund infrastructure projects and directing resources towards job creation,” said Kirsten.

On SA’s future economic outlook, Kirsten said: “Economic stability largely depends on market sentiment and the rand’s reaction to the budget discussions and outcomes.

“In the medium to long-term, achieving a growth rate of 3% and beyond is crucial. Promises made by the GNU regarding economic growth and structural reforms must be implemented swiftly to build public confidence and trust.

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“Achieving the desired economic outlook will require structural reforms, increased infrastructure investment through PPPs and successfully navigating ongoing geopolitical challenges.”

‘Consider borrowing’

Political economist Dr Sam Koma said the immediate option for Godongwana was to consider borrowing.

“He should look at the World Bank, International Monetary Fund (IMF), the African Development Bank and the New Development Bank of Brics. Domestically, he can leverage the massive investments of the Government Employee Pension Fund and our capital market,” said Koma.

“Already, the World Bank and the IMF have projected SA’s economy to grow 1.9% in 2025 and trending upward thereafter.

“Government needs to fasttrack implementation of economic reforms involving Eskom and Transnet. It should also ensure water security and rationalise the more than 700 SOEs into a lean number.”

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