As Finance Minister Enoch Godongwana prepares a new budget for May 21, 2025, South Africa is at a fiscal tipping point. Godongwana is attempting for a third time to gain parliamentary approval after attempting twice before and failing mostly due to differences within the government over the proposed tax hikes that had resulted in them not being approved.
The original budget from February contained a proposed two percentage point increase in the value-added tax (VAT) in response to a 75 billion rand ($4.1 billion) budget gap. However, the proposal met with stiff resistance from the Democratic Alliance (DA), a coalition partner and it was withdrawn. A subsequent proposal to implement the VAT in two 0.5-point increments spread over two years also met resistance and ultimately became an issue of litigation, including further political conflict.
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Strategies to Address the Shortfall
With VAT hikes off of the table, Godongwana must find other avenues to relieve the fiscal gap. This could include trimming down the expenditure, as well as possibly depending on the possibility of stronger than expected tax contributions to fill the gap. The South African Revenue Service recently announced that it had collected 8.8 billion rand above what they had anticipated for the 2024-2025 financial year which alleviates some of the fiscal position by Reuters.
Furthermore, the government may consider minor increases in domestic bond issuances and tapping the Gold and Foreign Currency Contingency Reserve Account, which had an available amount of 390 billion rand as of April.
The revised fiscal plan will most likely be viewed closely by credit rating agencies. It could potentially lead to the first credit rating upgrade in 20 years for South Africa if the plan is credible. Alternatively, the plan could also increase borrowing costs and decrease investor confidence if it is not credible.
With the May 21 electoral contest just around the corner the government’s ability to manage coalition dynamics and implement effective fiscal actions will be critical in shaping South Africa’s economic future.
