Flip-flops and fiscal fears: SA treasury faces harsh new reality

Key topics:

• Treasury faces credibility test after scrapping VAT hike again

• Coalition politics complicate budget approval and revenue plans

• Investors uneasy as deficit widens with no clear funding strategy

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*By S'thembile Cele and Ntando Thukwana

The credibility of South Africa’s National Treasury is under scrutiny after two months in which it’s had to backtrack on its budget proposals twice.

After decades of driving the budget and getting it rubber-stamped by a Parliament dominated by the African National Congress, the Treasury — one of the country’s most respected institutions - is now being tested by a new political environment in which other parties are flexing their muscles. The ANC was forced into a coalition after losing its outright majority in elections last year.

The government is grappling to meet spending needs while keeping the deficit under control. But in a midnight statement this week announcing a third revenue-related revision to the budget, Finance Minister Enoch Godongwana offered no specifics on how he planned to plug the 75 billion-rand ($4 billion) shortfall left by the scrapping of an increase in value-added tax. That will now be left to new talks with lawmakers — and time is running out, as the budget has to be approved by July.

“This is a turning point for the National Treasury,” said political analyst Susan Booysen. “It is not life under a strong, majoritarian government. It will have to give evidence that it is prepared to listen, to learn that lesson, and to do that very rapidly.”

With the Democratic Alliance, the second-biggest party in the 10-member coalition, and other parties opposed to any tax increases, Godongwana’s options are limited. An increase in borrowing would leave investors uneasy, while spending cuts would be a hard sell politically.

So far, bond investors appear to be giving Godongwana the benefit of the doubt. Yields on benchmark government 10-year securities have dropped 26 basis points this week, while the rand has edged stronger against the dollar. However, investors will be scrutinizing his Budget 3.0 proposals carefully.

“It remains unclear what the way forward will look like, where Treasury will find alternative revenue sources, and how sustainable those will be,” said Jee-A van der Linde, a senior economist at Oxford Economics. “If increased borrowing were to form part of new funding sources over the medium-term expenditure framework period, rating agencies and investors would get more concerned.”

Godongwana this week said the scrapping of the VAT increase would have “consequential implications” for spending, without giving details. The Treasury did not immediately respond to an emailed request for comment.

One option would be to reprioritize existing spending, with cuts to some allocations. That would solve the problem for this fiscal year, but the Treasury is also looking at raising revenue over the medium term by drawing from sources such as the Unemployment Insurance Fund and the National Empowerment Fund. 

Borrowing remains the least desirable option, as Godongwana will push to maintain the credibility of the fiscal envelope amid the political pressure, with the economy already at risk of a slowdown due to the Trump administration’s tariffs.

‘Certainty Matters’

“For markets, what matters is the certainty of a revenue measure versus a somewhat vague promise of maybe this could be compensated for by spending cuts,” said Razia Khan, the chief economist at Standard Chartered Plc.

Scrapping the VAT increase, having already reduced it once before, threatens the nation’s debt-sustainability targets, said independent analyst Khaya Sithole. Tax policy pronouncements could no longer be guaranteed, making markets “skeptical,” he said.

“If you came up with three different answers within a matter of weeks, how are we to know that even the commitments you’re making now on your spending patterns and your spending ceilings” will be adhered to, Sithole said. “What we are now experiencing is a serious credibility crisis for National Treasury.”

© 2025 Bloomberg L.P.