There are deep political potholes ahead for the government of national unity (GNU) as it seeks to refashion the budget. A key question is: will it take a scalpel to the notoriously bloated public sector wage bill?
It is broadly agreed that the two options the government had to rein in its finances were a tax hike or spending cuts.
Now that the former is off the table, it is likely that “plan B” will come into play. This could affect the health and education budgets, which will be felt in the long term unless there is a push to grow the economy above current projections over the medium term.
Finance minister Enoch Godongwana put on a brave face when briefing journalists on Wednesday, but he has a job on his hands as he and his team rework the budget. His original budget, which journalists saw under embargo ahead of the last-minute postponement, indicated a shift in fiscal strategy from spending cuts to hiking taxes to fund an increase in spending.
Godongwana had proposed an additional R173bn in spending over the next three years, with a large chunk going to front-line services, healthcare and education. The cabinet’s rejection of a VAT increase to fund it means the 10 parties in the GNU will have to accept spending cuts.
ANC ally Cosatu also rejected the suggestion of a VAT increase behind closed doors, though its public critique in the run-up to the budget was uncharacteristically muted. The reason for this is simple: its majority public sector affiliates could be hit hard given that they had just concluded a three-year wage deal with government for an above-inflation pay rise.
Drowned out by the drama surrounding Godongwana’s aborted budget on Wednesday, the three-year deal will see the country’s 1.3-million public servants receive a 5.5% pay increase for 2025/26, while wage increases for 2026/27 and 2027/28 will be linked to the consumer price index.
The three-year pact is accompanied by sweeteners too, including increases to homeowners’ allowances, danger allowances, special danger allowances and service allowances for members of the police.
The deal swells the wage bill to over R700bn, a huge impediment to stabilising the public finances. But while the public sector wage bill accounts for a large chunk of the national budget, and was once the single largest item of spending, it has since been replaced by debt service costs.
The Treasury and GNU will in the coming weeks be weighing up various alternatives to the VAT hike and the economic — and, crucially, political — risks associated with each.
ANC insiders expressed surprise that the party’s top seven leadership — an informal structure (but powerful nonetheless) that includes President Cyril Ramaphosa, deputy president Paul Mashatile and secretary-general Fikile Mbalula — did not put up a bigger fight against the proposed hike in the VAT rate, from 15% to 17%.
The political impact as SA heads towards the 2026 local government election could have been “huge”, the insiders say, with the possibility of protests and political instability that would benefit Jacob Zuma’s MK party and the EFF.
During the discussion postponing the budget in parliament on Wednesday, the MK party’s Mzwanele Manyi already seized on the proposal, arguing that the GNU wanted to “impoverish our people”.
Since 2016 municipal elections have been largely fought on national issues — it is not inconceivable that workers and middle income voters would have registered their anger at the VAT hike in the municipal election next year, particularly as it would have been coupled with the looming 12.7% increase in electricity, approved by the National Energy Regulator of SA last month, that is set to take effect on April 1.
A key question now is how Godongwana will cut spending without worsening the provision of services — it could be argued that these are abysmal anyway, but for the vast majority of South Africans there are no alternatives to public education and healthcare.
For their part, the unions fear government could renege on the freshly signed wage deal before the ink dries, especially as there is precedent for such a move. In 2022 the Constitutional Court set aside a three-year wage deal that was pushed through without the requisite approval from the National Treasury, though the context of that judgment was different.
While the GNU politicians will bluster over who was the loudest in opposing an unpopular intervention to stabilise the country’s finances, Godongwana and his team will have to quietly set about the delicate task of cutting government spending.
• Marrian is Business Day editor at large.
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