Budget speech postponement embarrassing but might be sign that GNU works

The embarrassment of postponing the budget speech until 12 March could have been avoided if the ANC communicated with the speaker in advance to postpone when the ruling party saw that they would not reach consensus on increasing VAT by 2%, but on the other hand it shows how well the government of national unity works.

Prof. Bonke Dumisa, an independent economic analyst, says it is unfortunate that the differences between the ANC and DA on the issue of any tax increases had to play itself out so badly and embarrassingly this afternoon.

“The ANC has been in power for a long time and understands how these things work. Upon realising that the issue of a possible 2% increase in VAT was going to be very divisive and would divide the community, it would have made sense to postpone.”

He says while he does not usually agree with the DA, he believes that this time they were right as he believes tax increases should not have been on the table.

“Increasing VAT is regressive. Remember when VAT was increased in 2018 because Zuma wanted to buy votes? An increase in VAT would affect poor people the most, but then VAT is the easiest tax to collect.”

Prof. Jannie Rossouw, visiting professor at the Wits Business School, did not want to comment on the postponement and the VAT increase because he was part of the group of economists and journalists in lockdown on Wednesday morning and believes it is unethical to talk about a speech that was not delivered.

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Budget 2025 postponement risky, but shows GNU works

George Herman, chief investment officer at Citadel, says it is embarrassing and a first in our democratic history, imputing uncertainty and speculation, with markets pricing in a higher risk as this is highly unusual.

“However, this was also the first time in the new democratic era that the ANC had to negotiate the budget with other parties. Previously the budget speech was followed by the rubber-stamp approval of Cabinet. This process is now more robust and shows that the government of national unity (GNU) has healthy counterbalance in important decision-making. This is not a breakdown of the GNU but rather enforces it.”

He points out that tension in the GNU has been building for a while about the ANC’s lack of discussion with the other parties and just continuing on their previous path. “This unfortunate event is just a growing pain of a new era of power-sharing politics and by no means a crisis.”

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Surprise that finance minister opted for VAT lever

Herman says he is surprised that the finance minister opted for this lever. “VAT is a very effective tax because its net is so wide, but it is also a very regressive tax, as it hurts poor consumers more than others.

“Even an increase of the zero-basket does not nullify this effect as consumers should not be forced to stick to that small choice universe just to avoid VAT. It is clear that the minister was hard-pressed and needed this estimated R58 billion to ‘balance the books’.

“VAT also increases revenue immediately while other tax increases only deliver the revenue at a much later stage. Was he pressed for time? We know they face an IMF loan maturity of $4.5 billion in June and they do not want to roll that at current interest rates. VAT is a politically loaded tax which clearly would not have carried the support of most parties in parliament. This once again points to desperation.”

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GNU should have been ready for budget speech

Frank Blackmore, lead economist at KPMG, says there was reaction from the ground as well as the bond and equity markets that were negative at the time. “You would have thought that even the GNU with its constituent parties would have had a strategic plan for the economy over the next three years that would have been debated and finalised before the Budget 2025 event took place, which was obviously not the case.”

However, he does not think it is the end of the world if the right outcome is reached at the upcoming budget, although it would have been better to avoid this incident as it played out.

Jurgen Eckmann, wealth manager at Consult by Momentum, says the postponement initially came as a shock and its immediate impact on markets and the exchange rate was clear. “Markets tend to ‘spook’ easily but it is important to remember that this volatility is generally temporary. While we may see some short-term selloffs in the market, this should not be seen as an indicator of sustained or long-term negative sentiment.”

He says there is also a shining silver lining: the strength of the GNU has been demonstrated, introducing more voices and perspectives into the decision-making process and ultimately promoting greater accountability.

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Postponing budget speech will have consequences

Professor Raymond Parsons, economist at the NWU Business School, says the unprecedented decision to postpone the budget speech will have unintended consequences for South Africa’s political economy.

“Nonetheless, if the eventual budget in March turns out to be truly committed to growth and job creation, the delay will be worthwhile if the GNU gets agreed ‘trade-offs’ and better outcomes for the economy as a whole.

“Fundamentally, the sharp controversy about the tax burden can basically be seen as symptomatic of the fact that economic growth in the country has been too low for too long. The tax base as a whole has shrunk as a result, given persistently low growth, thus limiting financing options.”

He says the postponed budget speech will nonetheless create an elevated level of policy uncertainty for now, which has already been reflected in the rand. “Markets will now be carefully monitoring the progress being made by the GNU from now on in finding sufficient consensus about the final budget.

“However, the fiscal situation has not been left open-ended. Meanwhile, National Treasury’s communication strategies will need to be adapted to the new circumstances. Between now and March 12 there should be an informed and reasonable debate about what fiscal options are indeed available to strike the right balance between spending, borrowing and taxing in ways that promote policy certainty and job-rich growth.”