EDITORIAL: Budget 2.0 needs GNU’s stamp of approval

By the time SA’s national budget was postponed at the very last minute on Wednesday, journalists and economists in the traditional “lock-up” in parliament had already read and digested the full suite of budget documents, under embargo of course. That will provide an unprecedented opportunity to compare and contrast Wednesday’s budget-that-wasn’t with Budget 2.0 — the amended version that finance minister Enoch Godongwana will table on March 12, assuming the cabinet can reach consensus the second time around.

We will know, in other words, exactly what compromises have been made and whether the government of national unity (GNU) partners have indeed engaged with the budget. Godongwana said they now would. Clearly they should. And in contrast to the situation in the two weeks leading up to Wednesday’s debacle, when cabinet ministers had been briefed on the broad outlines of what the finance minister proposed, this time they have been privy to the full detail.

The budget is, or should be, the fiscal expression of the government’s political and policy choices. This is the GNU’s chance to put its stamp on Budget 2.0. Most of the parties in the coalition are new to governing and have not really had to engage with the nuts and bolts of tax policy decisions and spending trade-offs before. Now they will. They need to step up. It needs to be a mature and informed debate about what’s good for SA, not the usual political point scoring — and that applies as much to the ANC ministers in the cabinet who opposed the proposed VAT increase as to the DA and other ministers who did so.

They need also to justify the confidence markets have rather unexpectedly placed in them. Instead of hammering SA Inc as many expected, the markets’ response to Wednesday’s budget failure was sanguine. The debacle was widely seen as “democracy in action”, evidence that the GNU was a genuine coalition. The rand and bonds took a bit of a dive initially but later bounced back.

Nor did this only reflect comfort with the politics on the day. It was also a response to a budget that was seen as doing the right things — spending on much-needed front-line service delivery and funding this with a VAT hike. It may have also been a response to budget numbers that weren’t nearly as bad as some had feared.

In October’s medium-term budget, Godongwana had to revise down his revenue estimate by R22bn relative to last February’s national budget, because of weaker-than-expected economic growth and corporate profitability, and lower-than-expected imports and fuel spend ironically because load-shedding ended. This time, he added almost R3bn back to that figure, so expects to end this fiscal year with a shortfall of about R19bn. If that proves accurate once the SA Revenue Service closes the books on March 31, it will counter the pessimism of several economists who in the run-up to the budget predicted the shortfall could end up at more than R30bn.

Similarly, the budget ratios looked somewhat worse than in October, with the deficit seen stabilising next year as planned, but at 76.1% against October’s 75.5% forecast. But this was primarily because economic growth proved weaker than expected (so the debt was spread over a smaller GDP, as it were). As the National Treasury emphasised, the numbers showed the government sticking to its strategy on the primary budget surplus. That’s crucial.

But then there was the essence of the big change in Wednesday’s non-budget: “In the light of new and persistent spending pressures, government has decided to raise additional tax revenues, mainly by increasing the VAT rate,” said the Treasury. It added R173bn over the next three years to government spending, for essential front-line services, particularly in healthcare and education, as well as for infrastructure investment. On the list are allocations for early childhood development and to hire unemployed doctors, as well as for commuter rail. The Treasury also budgeted for the extra R23bn needed to pay for last week’s 5.5% public service pay increase, pointing out that though the settlement is higher than budgeted, it provides certainty for the three years of the medium term. “The government had to decide whether to leave these matters unattended, or address them,” the Treasury said. “The immediate nature of these spending pressures also required identifying the most efficient tax increases in order to meet the spending requirements.”

The most efficient tax is indeed VAT, politically controversial as it is. The proposed two percentage point increase would have raised R58bn in the 2025-26, flowing through to the medium term. The market approved. The cabinet clearly didn’t. Now it will have to ditch the spending plan — or come up with some other way to fund it. We wait with great interest to see what it opts for by March 12.