Economists fear crucial budget vote could threaten economic stability as tensions rise

The nation is waiting on tenterhooks as the joint Standing and Select Committees on Finance are set to vote on the fiscal framework on Wedneday, approving or rejecting the National Budget tabled by Finance Minister Enoch Godongwana last month. 

Godongwana's Budget proposed adjusting the VAT increase to 1% over the next two years, but the fragility of the Government of National Unity (GNU) has been laid bare since then as the Democratic Alliance (DA) said it would not support the proposed VAT increase.

Frank Blackmore, lead economist at KPMG South Africa, told Business Report on Tuesday that all options were still a possibility in terms of outcomes.

"The most beneficial outcome for the country would be one in which expenditure cuts are made and the VAT increases are scrapped with more focus in the budget being dedicated to economic growth over time," Blackmore said.

"I think this would be positive both in terms of bond and equity markets viewpoints. It would also be rand positive, and I think it would give a boost, both in terms of the trust of the GNU as well as the sort of stewardship of the economic components of the country moving forward."

Blackmore added that the DA stated that not many of the proposals provided to the ANC have been accepted and plans on voting against the VAT increase.

Sanisha Packirisamy, chief economist at Momentum Investment, said the proposed fiscal framework appeared to be the market’s default expectation featuring a suggested 0.5-percentage point hike in the VAT rate and increased spending for the 2025/26 fiscal year.

"There is a chance it will not pass within the 16-day timeframe, potentially leading to changes in revenue and expenditure plans before final sign-off. If it gains approval, perhaps with compromises between the DA and the ANC, it will head to Parliament for a confirmation of the fiscal framework. Adoption without DA backing is not impossible, but it would complicate the approval of legislation later in the process, given the slim non-DA majority," Packirisamy said.

"Should Parliament reject it or lack a quorum, the finance minister will rework the plan in alignment with the committee's input, likely dropping the VAT rise and scaling back spending increases. The revised framework would then be resubmitted, restarting the 16-day clock. This cycle will repeat until it is adopted, with a hard deadline of 31 July 2025 for the Appropriation Bill's finalisation." 

Tertia Jacobs, treasury economist at Investec, said that the budget standoff among the GNU partners extended beyond the initial disagreement regarding the proposed increase in VAT.

"The core issue lies in the urgent need for a more robust economic policy capable of addressing an economy trapped in low growth and struggling to generate jobs. The context of the budget is particularly concerning, with an economy that grew by a mere 0.6% in real terms and 4.5% in nominal terms in 2024 and projections of ~1.5% in 2025 with downside risks," Jacobs said.

"National Treasury is grappling with the challenge of stabilising the debt trajectory, currently at 76% of GDP, as outcomes consistently exceed the Medium-Term Expenditure Framework rolling three-year projections. The cost of funding, reflected in nominal bond yields, is surpassing the growth rate, complicating efforts to stabilise the interest payment ratio, which stands at 22% of gross revenues.

"While there is a pressing need for increased frontline spending in critical areas such as health, policing, and education, current expenditure is marred by significant waste, inefficiencies, corruption, and contractual irregularities. National Treasury continues to issue warnings regarding risks to the fiscal outlook, particularly as State-Owned Entreprises may require additional bailouts."

BUSINESS REPORT