Budget That Did Not Happen Becomes A Crisis That Should Never Happen

The cabinet will hold a special meeting on Monday on the budget after it was deferred to March in a day of historic high drama.

Government sources said that meeting will see ministers first briefed in detail about the budget Finance Minister Enoch Godongwana had to shelve after not only the Democratic Alliance (DA) but senior ANC members baulked at the two percentage point VAT increase he was about to table.

There will be further meetings on alternative proposals to raise revenue while containing debt and the deficit if that does not result in an accord, which it almost certainly will not given the DA’s triumphalist rejection of the proposed tax hike.

That would leave Godongwana and the treasury trying to find just shy of R60  billion to fund what the minister accurately termed flagging frontline services — health, education and commuter transport.

Leading economist Peter Attard Montalto said that implied painful expenditure cuts because raising R60  billion from other taxes would be hard, if not impossible — a fact Godongwana alluded to in a briefing on Wednesday where he reminded reporters that company taxes are raised on profits and this was not a boom time.

“With the red line on major increases from the DA, you have to do the heavy-lifting expenditure cuts and there will have to be pain,” Montalto said. “But you can draw down to lower reserves somewhat and so have to find, we think, more like R30  billion in expenditure cuts, not the full R60  billion.”

Montalto and other economists have read Wednesday’s events as a warning about political and procedural missteps around a budget that was sound at heart in setting out the path to a primary surplus but bedevilled by a bid to take the most simplistic route to raising revenue, without securing buy-in from all in the government of national unity (GNU).

“It turns out we were right to question it and we will end up at the same end point of no VAT hike, though by a rather mad route, by 12  March,” Montalto said.

Economists were able to question the VAT proposal because the cabinet and treasury leaks put it in the public domain well before Wednesday, by which time DA strategists were tweeting that the party would not support the budget.

The treasury guards closely against leaks because they move the markets. This one resembled a flood, with social media and the Sunday press speculating about a VAT hike well in advance.

Duncan Pieterse, the director general of finance, noted with dismay that on Wednesday morning Business Day had run a story on accurately setting out what was in the prepared budget. 

A senior government source said it was plain that cabinet confidentiality was a thing of the past with a fractious 10-party coalition in place.

This raised the question of whether the treasury needed to rethink its budget process to allow greater transparency and consultancy, another source said.

Montalto said this was a hard question.

“It [the process] worked for 30 years because ANC ministers were asleep on budget issues and hence the left gets so angry when ANC cabinets are nodding through such conservative fiscalism,” he said.

“Clearly though, the status quo does not work under the GNU and you need to have a budget star chamber that deals with things and is taken into confidence, so it is a lesser evil.”

DA leader John Steenhuisen has made clear that his party demands a voice in budget-making, as it loudly does in any other area of policy-making.

Steenhuisen on Wednesday swiftly claimed credit for blocking what was always going to be an unpopular tax hike. 

He said the DA had “defeated” the VAT increase in a “victory” for South Africans who were spared a regressive measure that would have broken the economy. He did not elaborate on exactly how it had achieved this goal.

“Today was certainly a historic and unprecedented day in South Africa’s politics. But this is the new politics, the new normal of the government of national unity,” Steenhuisen said in a video statement late on Wednesday.

“We need more jobs, not more taxes. And we said very, very clearly that a budget that contained a 2% VAT increase would not enjoy the support of us and we would not be able to vote for it in parliament.”

It was ironic that the ANC’s refusal to make a shift to accommodate the reality that it now rules in coalition allowed the DA to position itself as the champion of the poor on Wednesday, political analyst William Gumede said.

“It could have been different if Ramaphosa had stuck to the GNU agreements of seeking consensus, bringing in the GNU partners, seeing this as a GNU budget not an ANC budget,” he said. “This budget was actually an ANC budget, it was not a GNU budget.”

As much was suggested by a throwaway line from Godongwana on Wednesday that one does not negotiate a budget.

Gumede said the ANC’s past approach to budgets and confidentiality would no longer work because the party itself was divided on being in coalition, which created inner discord and had contributed to this week’s extraordinary leak. 

“In the ANC of the past, everything was kept inside but now it will never return to that.”

Gumede said he believed the DA, the Inkatha Freedom Party and other coalition partners had no real choice but to block the budget because the ANC would simply have ignored their warnings on a tax that would have made South Africans cover a revenue shortfall created by many years of stubborn misspending.

The deadlock was made clear in an early morning call between President Cyril Ramaphosa and his fellow party leaders in the ruling coalition.

A source with knowledge of the content of the call said the minister said the alternative was raising income tax for the highest-earning categories, plus possibly hiking company taxes. 

But raising VAT from 15% to 17% was the preferable option because it guaranteed raising close to R60  billion to shore up frontline services.

Steenhuisen flatly told the president and finance minister that his caucus would not support tax hikes.

In his customary embargoed briefing to the media about two hours later, Godongwana said there was every risk that not all parties in the GNU would support the budget, particularly with local government elections taking place in 2026. 

“No one wants to lose their base. The ANC is no different in that regard,” the minister told reporters, adding that for all he knew members of his party might have taken to the streets while he was speaking.

The government has been at pains to point out that ANC ministers also objected to the hike, minimising the DA’s space to claim a popular victory.

Ramaphosa’s response to the delay of the national budget was one of unflappable calm. “The government of national unity will, in the coming days and weeks, intensify our efforts to balance the imperatives that drive the fundamental growth objectives of this administration with the realities of a constrained fiscal environment. We are working as partners to ensure that the budget is one that works for individuals and investors alike.”

Party sources said the president and his allies in cabinet would continue to treat the DA’s battle talk as a way of it dealing with the dichotomy of being in government while trying hard to persuade its constituency that the party has not lost its identity.

The more Steenhuisen turned up the volume, the more loudly he was saying that the DA is staying in the coalition and justifying that decision to his supporters, one said.

But Gumede said he was seeing the consequences of the ANC’s refusal to shift from the mindset of a majority party to that of one that needs to forge true consensus with its coalition partners. “That is unfortunately where the problem is, the ANC’s inability to move from a majority culture of decision-making to a consensus culture. It is deeply ingrained in the ANC over the last 30 years and they seem unable to get out of that, causing crisis after crisis.

“So we have two crises now, we have a budget crisis and we have a fallout with the United States. Together the two could have a systemic impact on the country.”

Gumede said he believed Ramaphosa had missed an opportunity to find in the coalition he assembled after the loss of the ANC’s majority last May, a way of breathing new life into governance, and had continued to defer his party and its timeworn policies.

“The ANC does not have the ideas, the competence, to change even if they wanted to. The ANC does not see anything as a crisis, they do not see the high unemployment, the high crime, the economy might tank because of the fallout with [US President Donald] Trump, they don’t see it as a crisis. This is our fundamental problem right now.”

In terms of fiscal policy and ideological decisions the government has “kicked the can down the road one too many times” over the past 15 years, Centre for Risk Analysis executive director Chris Hattingh said.

“We’re at this inflection point, potentially for the fiscus, the GNU and parties like the ANC and the DA,” he said.

“There is no one pole of power and compromises are needed. And, the government continues to function, as it were, despite strong disagreements. We will need to judge whether today marks a true inflection point, or not, versus the revised budget set to be delivered on 12  March.”

University of Johannesburg political analyst Oscar van Heerden said the opposition to the VAT increase showed that the ANC’s old ways of keeping the tax debate as a subject between the minister and the president out of the public and parliamentary debate would need to change.

He said the budget followed a fixed process prescribed by law and it was “astonishing” that there wasn’t sufficient time and room for the government to knock out their differences before this week.

He said ANC ministers Kgosientsho Ramokgopa and Ronald Lamola were among those who had opposed the VAT hike. 

“The component that is always open for discussion and debates is the expenditure part. But there is a practice in South Africa where the tax part is not open for debate. It remains something between the treasury, the minister and the president,” Van Heerden said.

“It used to work in the past, because you had a majority party in parliament that could push through the budget. But … is not the case anymore because we are now in a government of national unity, in a coalition government, so the ANC can’t push this thing through on its own.

“There hasn’t been a change in the procedure since there [has been] a coalition government, and this is what has now caught the president, the minister and treasury out because you can’t continue an old practice with new rules.”

The DA and other parties would have to learn how to operate in coalition politics, Van Heerden added.

“They might think that they scored some quick points, but actually it’s quite damaging to the country and to the GNU, because the markets responded, they don’t like the instability,” he said. “It comes across as if we don’t know what we are doing, and we need to be sensitive to those issues, whether we are on the ANC side or the DA side. So I think everyone needs to take this as a lesson as to how not to do it.”