The ACDP believes that there is great potential for accelerated economic growth and job creation following the formation of the government of national unity (GNU), progress on structural reforms in the electricity and logistics sectors, and renewed optimism in the financial markets. This has seen the return of investor and consumer confidence with the Johannesburg Stock Exchange (JSE) all share index recently reaching record levels.
We now also know that the proposed 2% VAT increase from 15% to 17% to fund the R60bn tax shortfall was rejected by GNU partners which led to the budget speech being postponed. While the ACDP also opposes this proposed increase in VAT, we expect that there will be a smaller VAT increase of about 0.5% per year for the next three years, to partially make up the budget shortfall of about R60bn.
Taxpayers are correctly demanding value for their taxes paid, which they are not seeing with renewed power outrages and water outages, and dysfunctional municipalities. Far more needs to be done. Wasteful and excessive government expenditure such as on the bloated cabinet and departments can and must be reduced.
In addition, the ACDP has always maintained that billions of rands stolen through state capture and corruption could be recovered by further capacitating law enforcement and prosecution agencies, including the Hawks, the Special Investigating Unit, and the National Prosecuting Authority (which includes the Investigating Directorate against Corruption and the Asset Forfeiture Unit). The proposed R3.4bn funding to the South African Revenue Services (SARS) should remain in place to enable SARS to reduce the tax gap, which is the difference between taxes legally owed and taxes collected, which is estimated at about R800bn. Collecting even 10% of this outstanding debt will easily cover the R60bn budget shortfall.
We now know from StatsSA that economic growth is at a disappointing 0.6% of GDP for the 4th quarter of 2024, almost half the growth estimated in the 2024 Medium Term Budget Policy Statement (MTBPS). National Treasury optimistically expects the economy to grow at an average 1.8% for 2025 and 2026. While this level of economic growth is still far too low, the ACDP trusts that with the necessary structural reforms in energy and logistics and the focus on infrastructure development, economic growth can exceed 3%, which is needed for increased revenue collection and to start addressing high levels of unemployment and poverty.
We expect the budget deficit for 2024 to be slightly weaker at 5% of GDP, up from 4.5% of GDP estimated in last year’s medium term budget policy statement (MTBPS). This fiscal slippage will result in the state’s gross loan debt peaking at a staggering 76.1% of GDP for 2025/26 fiscal year, higher than the 75.5% previously forecast, and much higher than the 60% maximum sustainable debt ratio for an emerging market economy. Escalating debt service costs – more than a billion rand per day or 22 cents of every rand of revenue raised – crowd out expenditure on other much-needed budget items, such as health, education, and fighting crime.
A severe risk to economic growth prospects is the poor relationship with the United States, which has resulted in the loss of $R440 million in US foreign aid and placed the extension of the African Growth and Opportunities Act (AGOA) into serious doubt (with $4bn in preferential exports and a total of $20bn at risk should South Africa be removed from the programme). The agricultural, automotive and manufacturing sectors will be the most severely impacted and this will have a very severe impact on economic growth prospects. The SA Reserve Bank’s Monetary Policy Committee has modelled a possible trade war scenario with a universal ten percent increase in US tariffs, with retaliatory measures by other countries. It may be much higher. Everything possible must be done to normalise diplomatic and trade ties with the US.
While the ACDP does not support further bail-outs to state-owned companies, we expect that Transnet may be granted additional guarantees to refinance its maturing debt and operational requirements. We also welcome the private sector participation in Transnet’s operations as it is crucial that Transnet, like Eskom, performs optimally given the crucial role its rails and ports play in facilitating exports.
We also believe that corporate and personal income taxes should not be increased given the financial pressure already facing households and businesses, as well as potentially harming economic growth and job creation. In order to increase revenue, we expect that there will be less relief for taxpayers for ‘bracket creep’, possibly above- inflation increases in sin taxes (alcohol and tobacco products), as well as increases in the general fuel levy and Road Accident Fund levy. Medical aid tax credits will also be reviewed.
The ACDP notes the agreement in the public sector wages, which is higher than inflation at 5.5%, and the National Treasury projections of 4.5%. The bloated public sector wage bill poses a risk to government finances and must be addressed in the long term. We have also opposed the unaffordable national health insurance (NHI) and welcome ongoing discussions in the GNU to reach a solution to this issue.
The ACDP has raised the issue of the shrinking South African National Defence Force (SANDF) budget over the years. Yet the SANDF is expected to perform more and more peace-keeping and other functions both domestically and in Africa. While we note the MTBPS allocates an additional R3,5bn for carry-through costs for the deployment in the Democratic Republic of the Congo (DRC), it is clearly insufficient to provide critical combat air and other logistical support for our troops. Additional resources must be given to the SANDF or bring our troops home.
The ACDP will be closely studying the Budget proposals and recommendations to establish how realistic the economic growth, revenue and expenditure projections are, given the fiscal risks facing the nation, despite the tremendous potential of the GNU.
