Budget 2025 is the right hill to die on, for the Democratic Alliance. It cannot tolerate business as usual.
What, exactly, is the point of the Government of National Unity (GNU)?
If it is limited to posting a few worthies from former opposition parties to the Cabinet, in the hope that they can rescue a few government departments, that seems a very limited ambition.
We would all probably welcome a marginally more functional Home Affairs, for example. It is critical not only to citizens – some of whom are still not eligible to apply for smart ID cards 12 years after they were first introduced – but also to foreign visitors who need quick and painless access to visas.
We should not, however, consider the appointment of a handful of potentially competent ministers or deputy ministers, who appear to have little if any influence over broader government policy, a sound basis for a governing coalition.
A very effective way for the GNU partners to make themselves heard and influence policy, however, is to challenge the budgets of the African National Congress (ANC). As leader of the GNU, the ANC made the mistake of assuming it could spring a last-minute VAT increase on its coalition partners, without having negotiated for it.
It is commendable that the Democratic Alliance (DA) firmly refused to accept the proposed two-percentage-point increase in VAT, and that its GNU partners joined it in opposing the budget.
It is even more significant that it hasn’t settled for a compromise VAT hike, and now promises not to vote for any budget that raises VAT.
Business as usual
Budget 2025 as it was tabled in Parliament is a business-as-usual budget. While mouthing all the right platitudes about growth: “To meet our goals of redistribution, redress and structural transformation, the economy needs to grow much faster and in an inclusive manner. This is the central objective of the current administration,” said the finance minister, the ANC’s Enoch Godongwana. “Today’s Budget proposes a bold and pragmatic approach to achieving this formidable task.”
That’s nonsense. There’s nothing “bold and pragmatic” about the budget. It is a laundry list of above-inflation expenditure increases, funded by income tax bracket squeeze on the middle class – an about-turn from the tax relief promised in last month’s draft of the budget – and a VAT increase of 0.5 percentage points on everyone.
Godongwana said that he had “cautiously considered” a VAT hike’s “distributional effect and impact”.
He said he needed funding “for spending pressures for infrastructure investments, social protection, a higher-than-anticipated public-service wage agreement, and provisional allocations for critical frontline services”.
Infrastructure “investments”, much of which goes to make-work projects, tenderpreneurs and the construction mafia, are not a sufficient justification for increasing the tax burden.
Social protection is a noble ideal, but it cannot come at the cost of killing the goose that lays the golden eggs. Without new private investment, profitable companies, and wealthy individuals who don’t feel they’d be better off elsewhere, there won’t be any wealth to redistribute.
Wealth generation
South Africa doesn’t need more wealth redistribution. It already has more wealth redistribution than it can sustain. It needs wealth generation. It needs new wealth.
Earlier this year, I pointed out that wealth redistribution is both an immoral violation of private property rights on the face of it, and in practice destroys wealth. A society that tries to combat poverty by means of wealth redistribution sacrifices aggregate prosperity for doing so. Over time, this erodes the ability of the economy to create new wealth, and ultimately, everyone ends up equal, but equally poor.
Sound economic policy should always prioritise wealth creation, above almost any other socio-economic concerns. Prosperity is what enables a country to achieve everything else it sets its mind to.
Any budget that doesn’t make radical structural changes to prioritise a lower cost of doing business and more productive capital should be dead on arrival in Parliament.
Inefficiency losses
As if to acknowledge the harm that a VAT increase would do, especially to the poor, Godongwana hedged the increase with higher social grants and a slightly broader range of VAT-exempt goods. He also, as if doing us all a favour, promised not to increase the fuel levy.
These measures cancel out some of the effect of an increase in VAT, making the tax hike less retrogressive, but it introduces inefficiency losses. The state has to pay a bureaucracy to take money from one group of people (consumers) and give it to another (the poor), even assuming that this bureaucracy is efficient and honest.
It ignores, however, the indirect impact that a higher VAT rate will have on the poor. Commercial rents are subject to VAT. So is fuel. Middle-class consumers will curb their spending to accommodate an increase in VAT, reducing consumer demand. All these factors will have an inflationary effect on prices. Someone has to pay that VAT, and anyone who can pass the increase along to their customers, will do so.
It also ignores that the Davis Tax Committee recommended that zero-rating products was inadvisable, because it is an expensive intervention that benefits the rich more than the poor. Why appoint a committee only to ignore its recommendations?
Growth budget
It is significant that the DA didn’t just cave and meet the ANC halfway. That is the ANC’s usual strategy: propose something terrible, and then strut about looking all conciliatory and magnanimous when it meets the opposition halfway by imposing something merely bad.
The DA is clearly aware that its budget vote gives it leverage. It is one of the few effective tools it has to force a change in policy direction.
The DA has demanded a growth budget. Its election manifesto sets out its own vision of what such a budget would look like, and is, on balance, quite good.
At the start of the year, I wrote about the choices the government can make to prioritise growth, and pointed to various resources, including but not limited to those published by the Institute of Race Relations, that can serve as simple how-to guides.
The ANC’s GNU partners need to exploit the power that the budget vote gives them to introduce some of the important structural reforms that are needed to get South Africa onto a rapid growth path.
It needs to be far easier and cheaper not only to hire people, but to fire them. Import tariffs need to come down. Sectoral wage agreements must be abolished, and union deals must be limited to the companies that agreed to them. Minimum wages that place hurdles in the way of employment must be lowered or eliminated. Business licensing, regulation and bureaucracy needs to be slashed. Taxes should be simplified.
Waste and fraud in public procurement must be tackled in earnest (that alone can easily cover the entire budget shortfall that Godongwana wants to cover with higher taxes). The civil service needs to be streamlined and professionalised, and better-than-market public sector wages ought to be frozen.
Investment must be made attractive and globally competitive, not through isolated high-profile sweetheart deals with the government, but through repealing rafts of legislation that make it expensive, onerous and risky for private entities to spontaneously do business in South Africa.
Feet to the fire
The ANC will not voluntary do any of these things. Their feet must be held to the fire, and one of the few effective ways GNU partners have to do so is to be obstinate about passing budgets that do not deliver on at least some of these growth-friendly objectives.
It is possible that the ANC will call their bluff, and turn to non-GNU parties like MK and the EFF for the requisite votes to pass a budget. If that happens, the GNU partners must stand firm, and dissolve the governing coalition.
There’s no point in a coalition that merely toes the ANC line and cannot direct policy.
A smart campaign manager ought to be able to get a ton of election mileage out of the ANC blowing up the GNU. If that is the hill that the DA’s participation in the GNU must die on, it won’t have died in vain.
South Africa cannot afford business as usual.
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
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Image: Finance minister Enoch Godongwana of the African National Congress. GCIS file picture.