Budget 3.0 not unexpected, possible decrease in social grant increase

An economist says Budget 3.0 was not unexpected, while it is expected that the above inflation increase in social grants will be reduced.

Dr Roy Havemann, senior economist at the Bureau for Economic Research (BER) and head of the BER’s Impumelelo Economic Growth Lab, says the minister of finance essentially had two issues:

• Firstly, his powers to increase VAT by announcement relied on section 7(4) of the VAT Act. The ongoing court case regarding the constitutionality of this section has not been going well. Even if the court found in favour of the National Treasury, it would immediately go on appeal to the Constitutional Court, which would have taken weeks and take it past the 1 May implementation date. If the minister lost there, VAT would then potentially have to be repaid.
• The second problem was that even if he won the case, the increase would still need to be passed by the National Assembly. Action SA had indicated it would not support the increase despite voting in favour of the fiscal framework. This would leave a very small margin and to get a majority would require the full support of all ANC MPs and almost all the other small parties.

ALSO READ: A R1 billion U-turn: scrapping the VAT increase leaves no winners, just absolute chaos

Minister had to table budget with backing of GNU

Havemann already said a few weeks ago there would be consequences if the minister tabled a budget without the backing of the government of national unity (GNU) and that a third budget was likely.

He says the minister has effectively withdrawn Budget 2.0. According to the press statement published after midnight, the minister of finance has written to the speaker of the National Assembly to indicate that he is withdrawing the Appropriation Bill and the Division of Revenue Bill to propose expenditure adjustments to cover the revenue shortfall.

“Parliament will be requested to adjust expenditure in a manner that ensures the loss of revenue does not harm South Africa’s fiscal sustainability. The minister of finance expects to introduce a revised version of the Appropriation Bill and Division of Revenue Bill within the next few weeks,” Havemann said

He explains that these two bills, together with the Revenue Laws Amendment Bill, make up the “Budget”. Withdrawing these Bills is equivalent to withdrawing the Budget.

ALSO READ: Economists welcome scrapping of VAT increase

The process for Budget 3.0

In terms of process, that means:

• Treasury will effectively table a new Budget (Budget 3.0). Parliament must give a date for this.
• This does not pose any risks other than reputational. In terms of the Public Finance Management Act, spending can continue at the same rate as in the previous year.
• Constitutionally, interest payments on debt are ringfenced outside of the Budget as “direct charges on the National Revenue Fund” and continue to be paid indefinitely. There is absolutely no “shutdown” scenario, at least until the Medium Term Budget Policy Statement (MTBPS).
• The exact legal status of the fiscal framework is unclear. However, Haveman says a new fiscal framework seems likely due to the changes in the economic environment and the revenue implications.

ALSO READ: Where will the minister find the money to make up for scrapping the VAT increase?

What will likely be in the new Budget?

According to the press statement the decision not to increase VAT means that the measures to cushion lower income households against the potential negative impact of the rate increase must now be withdrawn and other expenditure decisions revisited.

“To offset the unavoidable expenditure adjustments, any additional revenue collected by Sars may be considered for this purpose going forward.”

Havemann says the BER reads that to mean that the above inflation increase in social grants will be reduced, potentially to inflation only and now to the much lower expected inflation rate. The BER also does not expect that the personal income tax brackets will be adjusted.

ALSO READ: Here is how the non-adjustment of personal income tax will hurt the working class

Is the fiscal position better or worse this time around?

This depends on how much the Treasury can cut. Havemann says. Many of the spending increases were tagged as “provisional”, which means that some of these could be delayed.

However, he says, the economic environment has changed, which has positives as well as negatives. “On the positive side, lower inflation means spending growth can be revised downwards in nominal terms but lower growth and lower inflation mean that revenue will also need to be revised.

“Budget 1.0 and 2.0 were based on 0.8% growth for 2024 (now confirmed at 0.6%) and 1.9% for 2025 (we are, for example, now at 1.5%). On balance, Budget 3.0 may well signal a more credible larger borrowing requirement.”

ALSO READ: Dismantling the GNU? — Mashaba’s next move after VAT increase U-turn

What this means for the GNU

Every day brings mixed news reports about the likelihood of the DA exiting the GNU, either of its own will or by being pushed out by the ANC, Havemann says.

“To be frank, whether the GNU holds is extremely hard to call and we need to be mindful that even if it holds for now, it will continue to be tested in the coming years. In an exit scenario, a weak DA within the GNU could be worse for policy making than a stronger DA in the opposition benches.

“Without the DA, a new GNU would have exactly 200 seats or 50% of Parliament and therefore it matters who will take the DA’s place, a scenario where the EFF or, more worryingly, MKP takes its place would result in a significantly more negative outcome compared to when smaller parties such as ActionSA and BOSA join the GNU.

“With ActionSA and BOSA included, the new GNU would have a very small majority, barely enough to pass major pieces of legislation, including the Budget.”