Budget 2025: Budget vote crucial test for GNU, will not change fiscal position

South Africans will hold their breath on Wednesday as parliament votes on Budget 2025, which includes the contentious 0.5% increase in value-added tax (VAT). Unlike past budgets under the ANC, this vote is a crucial test for the government of national unity (GNU).

Why is it so important? Jervin Naidoo, a political analyst at Oxford Economics Africa, points out that the outcome will shape the country’s fiscal policy framework and determine the long-term stability of the GNU.

Since its formation in July 2024, the GNU has been fraught with tensions, with disputes over legislation such as the Basic Education Laws Amendment Act and the Expropriation Act highlighting the ideological gaps between the ANC and its major GNU partner, the DA.

However, Naidoo says, the most dramatic showdown came on 19 February when Finance Minister Enoch Godongwana was forced to abandon his budget speech due to intra-coalition disagreements. The source of the dispute was a last-minute proposal to increase VAT from 15% to 17%, a move that sparked immediate backlash.

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Battle to find consensus on Budget 2025

Emergency cabinet meetings followed, but unity remained elusive, with the DA firm in its stance against new taxes. DA leader, John Steenhuisen said the ANC’s VAT budget does not have a majority in parliament and the DA will not give it one.

Meanwhile, senior ANC figure Gwede Mantashe accused the DA of holding the budget hostage over other policy issues, such as the Expropriation Act. The VAT increase was expected to generate R58 billion in revenue.

On 12 March, Godongwana returned with a revised budget, announcing a 0.5% increase in VAT. Again, Steenhuisen emphasised his party’s opposition to tax hikes but left room for negotiation, saying there is still time to talk.

After weeks of tense negotiations, reports indicated late last week that a compromise was close, with talks between the ANC and DA leading to agreements on broader expenditure reviews and economic decentralisation, particularly regarding ports and rail.

According to an ANC insider, who spoke to the media on condition of anonymity, the deal included all GNU partners, not just the ANC and DA. While the details remain unclear, ANC secretary-general Fikile Mbalula confirmed progress after the ANC also held its National Executive Committee meeting over the weekend.

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Number of votes needed to pass Budget 2025

Naidoo says that with 159 seats in the National Assembly of 400 seats, the ANC needs 201 votes to pass the budget. The easiest path is securing DA support, given the party’s 87 seats. Without it, the ANC must rely on smaller GNU partners and possibly outside parties, making negotiations complex. The GNU controls 287 seats.

“If parliament rejects the budget, a structured process will follow to ensure essential services continue. First, the finance minister has to revise the budget to address concerns and resubmit it. If it is rejected again, the Public Finance Management Act allows emergency interim funding for up to four months, covering essential services with up to 45% of the previous year’s budget, but government salaries and infrastructure projects may face delays.

If the deadlock persists, the president may mediate or reshuffle the cabinet. If no resolution is found, the president can invoke section 50 of the Constitution to dissolve parliament and call a general election within 90 days. As a last resort, the Constitutional Court may intervene to provide legal guidance or compel parliament to approve an emergency budget.”

Naidoo says the unprecedented budget impasse in South Africa has sparked concerns about fiscal stability and endangered the GNU coalition, but it is important to remember that this is the first coalition government in democratic South Africa.

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Rand’s partial rebound shows investors believe Budget 2025 will be passed

Although the 1994 government was also a GNU, the ANC held the majority and the GNU was primarily part of the nation-building process post-1994. While disagreements are inherent in coalition governments, they appear more pronounced due to the novelty of this governance structure, Naidoo says.

“While reports indicate that the ANC and DA are progressing in their discussions, we believe external pressures from the US regarding Pretoria’s foreign policy are also shaping the ANC’s decisions. Investors are wary of South Africa’s strained relations with Washington, and prolonged budget uncertainty only adds to the ANC’s challenges.

“The South African rand’s partial rebound this morning signals some market optimism that a deal will be reached, reversing some of the losses incurred on Friday when fears of a DA/ANC impasse rattled investors.”

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Budget 2025 negotiations overshadow macroeconomic implications

Naidoo notes that the ongoing negotiations overshadow the macroeconomic implications of the deficit targets, government debt levels and proposed tax hikes, with investors seemingly more focused on how these negotiations reflect the GNU’s functioning.

He says Budget 2025 promises fiscal adjustment down the road. “However, we find the underlying budget assumptions optimistic. In its current form, the budget is unlikely to improve South Africa’s fiscal position.

“Moreover, the budget neither boosts nor drags down growth because it is neither clearly expansionary nor contractionary. Consequently, our views of South Africa’s fiscal situation have not changed much since the previous budget update.”