South Africa’s government locked in budget stand-off

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South Africa’s leaders are at loggerheads over the national budget, which is due to be presented next week in a major test of the viability of the country’s coalition government.

The minority parties in President Cyril Ramaphosa’s government rejected a draft budget at the eleventh hour last month which proposed hiking VAT to fill a R60bn ($3.3bn) fiscal hole created partly by President Donald Trump’s withdrawal of US funding for HIV/Aids programmes.

Members of junior coalition parties told the Financial Times an agreement had not yet been reached, despite Ramaphosa’s office saying the finance minister and Treasury “are now set to finalise the budget and [introduce] it before parliament” after an emergency cabinet meeting on Monday.

“It is by no means a done deal,” said one government official, who spoke to the FT on condition of anonymity to discuss internal conversations. “Some of the parties will not accept any tax increases, but the reality is there is just no money.”

The budget stand-off is unprecedented in South Africa, which has been ruled by a grand coalition since July when Ramaphosa’s African National Congress partnered with nine other parties after failing to win an outright majority for the first time since the fall of apartheid.

“The ANC had been the majority party for 30 years, so it had taken it for granted that the budget would sail through,” said Songezo Zibi, leader of Rise Mzansi, one of the coalition partners. “But this isn’t so easy in countries where there is no single majority party, and the ANC didn’t seem to appreciate that a budget deadlock can paralyse a country.”

The central conflict was the plan by ANC finance minister Enoch Godongwana to raise VAT from 15 per cent to 17 per cent — a proposal resisted by the Democratic Alliance, the coalition’s second-largest party, and even some ANC ministers.

The business-friendly DA has proposed making up the shortfall through a number of other measures, including selling two major port concessions to the private sector and creating a cost-cutting task force similar to Elon Musk’s efforts in Washington. 

“If we don’t tackle the hard realities facing the country, we’ll be stuck in the endless cycle of raising taxes and taking on more debt, which we can no longer afford,” John Steenhuisen, DA leader and agriculture minister in Ramaphosa’s cabinet, told the FT on Wednesday.

After Steenhuisen rejected the first budget, the ANC said it was critical that money was found to honour wage increases for civil servants and pay for “above-inflation increases in social grants, [which] will protect the most vulnerable from the rising cost of living”.

South Africa’s fiscal policy must support “economic transformation and protect the poor, while fostering inclusive growth”, the party said.

In closed-doors meetings in recent days, Godongwana proposed a smaller VAT increase — between 1 per cent and 0.75 per cent — but even this was too rich for the DA, government ministers said.

“We will not, under any circumstances, vote in favour of a budget that does not speak to growth and jobs,” Steenhuisen said.

South Africa’s debt to GDP level has soared to nearly 75 per cent from less than 24 per cent in 2008, with almost 22 cents out of every rand collected by the government now going to service that debt.

Cracking down on corruption and cutting government bloat was necessary to balance the country’s budget, said Peter Attard Montalto, managing director of consultancy Krutham.

“The government has been looking for a magic bullet, and this doesn’t exist,” he said. “The easy cuts have already been made, which means the difficult political decisions that haven’t been made over the past decade have to happen now.”

Zibi said he expected party leaders to find agreement in time for the budget to be presented to parliament on Wednesday.

“I believe there will be consensus on the budget by the time it is presented next week, which may or may not involve a VAT hike,” he said. “But the Treasury has made the choices stark to all the parties, including the fact that the country cannot afford to borrow more.”