The Importance of The Budget

THE IMPORTANCE OF THE BUDGET

The South African National Budget is a cornerstone of the country’s economic framework, guiding the allocation of resources to meet the nation’s developmental and social needs.  Its importance cannot be overstated, as it reflects the government’s priorities and plans for economic stability and growth.  Recently, the non-approval of the Budget by the cabinet has brought to light significant weaknesses within the budgetary process, particularly issues of overspending and fiscal mismanagement. In this month’s Financial View, we look at just how important the Budget is.

Why the 2026 Budget was not approved

The recent non-approval of the South African Budget by the cabinet was primarily due to a controversial proposal to increase the Value-Added Tax (VAT) by 2 percentage points, from 15% to 17%.  The proposed hike had sparked significant debate and opposition from various political parties and stakeholders with the Democratic Alliance (DA) being particularly vocal against the VAT increase, arguing that it would place an additional financial burden on already struggling South Africans.  The Economic Freedom Fighters (EFF) also opposed the hike, with their leader Julius Malema criticizing the government’s handling of the situation and declaring that the government had “collapsed” due to its inability to manage the country’s affairs properly.

The postponement of the Budget Speech, which was unprecedented in South Africa’s democratic history, has led to uncertainty and concerns about the country’s financial stability.  The delay has highlighted the deep divisions within the Government of National Unity (GNU) and the challenges involved in reaching a consensus on critical fiscal policies.

The Finance Minister, Enoch Godongwana, indicated that the proposed 2% VAT increase was going to bring R60bn into the state coffers which would be used to fund, among other things, wage increases to public servants.  This has not gone down well with general South Africans.

The components of the Budget

The South African National Budget is focused on the expected cash flow of the country.  Within it includes forecasts of how much tax will be collected (revenue in the budget) and where the revenue will be allocated (in the form of expenses).

Anyone familiar with business will tell you that a company needs to generate a profit where revenue exceeds expenditure.  If you are a loss-making company, you either end up closing the business down or you will have to borrow money from someone that is prepared to fund you.

At Magwitch we argue that the Government is effectively the executives of the company called South Africa.  The financial decisions that they make should be no different to those that even a small business owner needs to make.  Unfortunately, our “executives” have just decided to spend, spend and spend some more, and in the absence of economic growth (which would boost tax revenue) have decided to borrow, borrow and borrow.  Usually, a company would borrow money to finance capital expenditure i.e. spending it on infrastructure, buildings, bridges, roads, airports, hospitals, schools etc.  But not on salaries and wages.

How much has been borrowed? 

If one looks at South Africa’s debt to GDP ratio going back to 1960 one would see that South Africa’s borrowings have never been higher in the last 65 years.  Delving into the last 30 years we see what a great job Government was doing in the late 1990s and the early 2000s as we enjoyed a period of significant economic growth which caused growth in tax revenue and resulted in a decrease in the debt to GDP ratio (and lower is better).

This period generally coincided with the presidency of Thabo Mbeki and was off the back of the GEAR economic policy.   In the mid-1990s, South Africa faced the daunting task of transforming its economy in the post-apartheid era.  The government introduced the Growth, Employment and Redistribution (GEAR) strategy in 1996 as a macroeconomic policy framework aimed at promoting economic growth, job creation, and redistribution of wealth.  GEAR emphasized fiscal discipline, trade liberalization, and public sector reform.

One of the key components of GEAR was the containment of the public sector wage bill.  At the time, the government recognized that unchecked wage increases could ultimately undermine fiscal stability and crowd out essential public services and infrastructure investments.  Despite these intentions, the implementation of GEAR faced significant challenges, including resistance from labour unions and public sector employees who demanded higher wages to address historical inequalities and improve living standards.

Mbeki and his Finance Minister, Trevor Manual, implemented sound macroeconomic policies that promoted fiscal discipline, reduced public debt, and controlled inflation.  These policies created a stable economic environment conducive to growth.  And growth was coming as South Africa benefited from the global commodity boom at the time.  Those indeed were the years of the Rainbow Nation.

A market crash and everything changed

You’ll note in the debt to GDP graph that everything changed in 2008.  This was after two significant events for South Africans.  The first was the Global Financial Crisis – the world entered a recession, and the tax collections decreased significantly necessitating the Government to enter the debt market.  The second event and potentially more damaging for South Africa was the election of Jacob Zuma as president of the ANC and, as a result, president of the country.

In 2008 the focus on fiscal discipline changed as GEAR was stopped as South Africa’s public wages saw significant changes due to the introduction of Occupational Specific Dispensations (OSDs).  These were designed to improve the salaries of skilled public servants, such as doctors, lawyers, nurses, and teachers.   The OSDs led to substantial once-off increases in basic pay for these professionals, aiming to attract and retain skilled workers in the public sector.

Additionally, the government implemented a series of wage agreements that adjusted basic pay at rates higher than inflation, further boosting public sector wages.  These measures were part of broader efforts to enhance the remuneration and working conditions of public servants, contributing to a notable rise in average public sector wages during that period.  The state became the biggest employer in the country with more being spent in the public sector than in the private sector where economic policy often discourages investment.

In addition to wage increases running well above inflation we saw the hollowing out of the justice system, as corruption became the norm, and State-Owned Entities were continually bailed out.  With our debt to GDP at record highs South Africa is forecast to spend R340bn on interest in the next year, close to R1bn per day.  Money collected is now spent on repaying interest and this is damaging to the economy as there is no return on these funds.  This is money that could be spent on health, education, policing or infrastructure.

What should the Government Do

We suggested that the Government should treat the finances of the country like those of the company.  With our Chartered Accountant hats on we brainstormed in the office what we would do if we were in charge (and we like to believe we would be pretty effective).

Revenue Side

• We don’t believe that there is any scope to increase tax rates. In fact, we believe that we are already beyond the tipping point and any tax rate increases will actually lead to lower tax collection.
• We think however that collection needs to be improved for illegal activities that are avoiding the required duties. The cigarette industry seems to be the lowest hanging fruit here in that per media sources there are a lot of companies not declaring their production quantities, and thus not paying their taxes.  The mining industry also appears to be problematic.

Spending Side

In our brainstorm we came up with an almost endless list of things that could be done so we have limited this list to just a few, which we feel are the most important.

• If someone steals from your business, you are likely to fire them and lay a criminal charge. Why has no high-level public servant involved with corruption been prosecuted yet?  In fact, they generally retain the job and get suspended on full pay. 
• Do a physical inspection of every single public servant. Determine those that have not appeared at  work for a period of time and end their employment.  Just like a business every staff member has a role to play and expected output against the pay cheque that they receive.
• Eliminate price gouging by paying the best price for quality products. As a standard practice obtain three independent quotes and always select the one that makes financial sense (with limited consideration of political sense).
• Stop cadre deployment and pay market related salaries to put the right person in the right job. If this individual needs to be poached from the private sector, then so be it but give them a clear mandate and allow them to apply their skills.
• Eliminate wasteful expenditure. There has to be consequences at all levels where expenditure does not fall in line with the Public Finance Management Act.  Make people accountable.
• Stop bailouts of State-Owned Enterprises. In fact, we would suggest that every SOE is assessed for its needs and if it adds limited value for its cost then close them down.  We don’t need a national airline carrier as an example.  Is the only reason for it remaining operational being that politicians get a certain number of free flights per year?
• Reduce the number of cabinet posts and positions for deputy ministers. During Nelson Mandela’s presidency (1994-1999), the cabinet initially comprised 27 ministers and 13 deputy ministers.  At this stage we have 32 ministers and 43 deputy ministers.  Would we say that the current government is more efficient with more people?
• Don’t waste money – R28 million advertising expenditure on NHI, which hasn’t even been implemented.

We feel that if the expense side was rationalised then the Budget could get into a position where annual surpluses are generated.  Those surpluses could be applied to reduce the debt, which in turn reduces the interest burden.  With less cash going to interest we could accelerate the paydown of the debt and increase the spend in areas that the Government should be looking after the citizens – being education, health and policing (how many people are having to pay twice for this service as they use a private product provider and still pay their taxes).