The decision by the National Treasury not to raise VAT to 15.5% on May 1 is the right one in the circumstances. After intense debate, a rise in VAT was found to be unnecessary, and for both economic and political reasons the proposed increase failed to command wide support. An unchanged VAT rate brings welcome certainty and relief to business and consumers and to that extent it is confidence-building. Nonetheless, several tough decisions still need to be taken to ensure South Africa's fiscal sustainability over the longer term.
Fiscal policy still faces certain key risks. To successfully manage them, a credible fiscal strategy designed to balance the books needs to be built into the third budget, which the Treasury will soon present to parliament. Parliament’s acceptance of the fiscal framework some weeks ago was based on the expressed commitment by the Treasury to find alternative ways to balance the budget within 30 days to avoid a VAT increase. The decision to now cancel the increase suggests that it is indeed possible to find offsetting measures, although the revised fiscal arithmetic and new undertakings are still awaited.
Broadly, the two main options are to further discipline government spending and to enhance tax collection efficiency to boost revenues. More borrowing should not be a solution. According to the Treasury, there remains a fiscal “gap” of R75bn over the next three years. Annualised, this means about R25bn per year. This is not unbridgeable — provided the political will exists to take further difficult fiscal and related decisions. It should also be possible to cover the remaining modest shortfall of about R13bn in the 2025/26 budget within a total budget spend of about R2.5-trillion.
But there are also crucial points to be gleaned from the VAT saga. First, it is now acknowledged that in future the budget process needs to be more consultative in nature. This will make for better understanding and decision-making around the political economy of fiscal policy. Second, greater investment is now going into Sars’ structures to improve tax collection. Third, much higher economic growth is now imperative for longer-term fiscal sustainability — particularly in the wake of recent, unprecedented global developments.
We must not underestimate the impact of these global developments — especially the aggressive US tariff policy — on a small open economy like South Africa’s. Global uncertainty has become the new normal. Both government and business strategies will need to be adapted to a new range of risks and appropriate responses formulated. It will also be a strong test of the heightened collaboration needed between the GNU and the private sector to meet these new policy challenges, especially on the foreign policy front.
Growth is not “a cure for all diseases, an end to all distress”. But it makes other goals easier to attain and softens the conflict among them. If South
Africa wants to grow its tax base to enlarge its fiscal space, it needs an expanding economy in which job creation accelerates, tax revenues rise and taxpayers believe they are getting value for money. The controversy surrounding the proposed VAT rise was driven by the widely held view that taxpayers’ money was being used inefficiently, whether through poor public service delivery or through corruption. Therefore, more robust economic growth needs to go hand in hand with tough spending reforms.
The growth outlook now needs to be revisited. The Treasury’s 2025 growth assumption of 1.9% underpinning the present budget looks too optimistic, especially given the latest IMF forecast of only 1% growth. Private sector economists’ growth projections for this year are equally conservative. Overall, the 2025 range of 1% — 1.5% GDP growth is simply too weak to significantly enlarge the tax base and generate the level of tax revenues required.
Accelerating the pace of long-promised structural reforms remains the best pathway to the GNU’s overall 3% inclusive-growth target in the medium term. It will enable the country to break out of its present low-growth trap. More than ever, a strategic pivot in growth policy is needed to create the economic buffers and resilience required to deal with new and unpredictable external shocks. Fiscal steersmanship, therefore, needs to ensure that the economy stays on the right track and outmanoeuvres the headwinds in 2025.
• Parsons is a professor at the North-West University Business School
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