Finance Minister Enoch Godongwana. (Photo: Mlungisi Louw/Gallo Images)
On 19 February 2025, at 2 PM, South Africans waited anxiously for Finance Minister Enoch Godongwana to table the 2025 budget speech.
The anticipation was palpable, with citizens eager to hear the government’s plans for the nation’s finances.
But in an unprecedented move, the speech was postponed to 12 March following internal disagreements within the Government of National Unity (GNU) over a proposed 2% increase in Value Added Tax (VAT).
President Cyril Ramaphosa simply conceded, stating, “We have limited revenue. Our revenue as it stands is not able to fund every priority that we have.”
This fiscal shortfall, however, is not merely a consequence of external economic pressures, but is significantly rooted in the government’s own actions over the past decade.
Wasteful expenditure, mismanagement of state-owned enterprises (SOEs), pervasive corruption, strained international relations and a reliance on external borrowing have collectively eroded the nation’s financial foundation.
Wasteful expenditure and SOE mismanagement
Over the past 10 years, South Africa has witnessed a troubling trend of escalating wasteful expenditure. In the 2023/24 financial year alone, fruitless and wasteful expenditure reached R2,57 billion, marking a 49% increase from the previous year.
This pattern is not an anomaly.
In 2017/18, during the twilight of the Jacob Zuma years, such expenditure was reported at R2,5 billion, indicating a persistent issue.
State-owned enterprises, intended to be pillars of economic development, have instead become symbols of inefficiency and financial drain.
Eskom, the national power utility, has been plagued by financial mismanagement, leading to neglected maintenance and frequent blackouts.
Similarly, Transnet, responsible for freight and logistics, has suffered from weak management, theft and sabotage, severely constraining South Africa’s export capacity.
These challenges have necessitated repeated government bailouts, diverting funds from essential public services.
To put it plainly, operational inefficiencies and infrastructure neglect have led to logistical challenges, costing the economy a shocking R1 billion daily in lost economic output.
The cost of corruption
Minister of Economic Development Ebrahim Patel reported in 2017 that corruption has further strained South Africa’s finances, costing the country between R27 billion and R100 billion annually.
These funds, siphoned through fraudulent contracts and embezzlement, could have been allocated to infrastructure, education and healthcare. Moreover, corruption had by then also cost the country 76 000 jobs. One can only imagine what that figure must look like today.
Strained international relations and trade implications
In 2022, South Africa’s trade with the United States was worth $3 billion, through the African Growth and Opportunity Act (AGOA), which grants duty-free access for certain goods.
But as diplomatic tensions rise, the country stands on the brink of losing these critical AGOA benefits. Should that happen, industries like automotive manufacturing and agriculture could suffer, leading to job losses and decreased export revenues.
Meanwhile, South Africa has increasingly turned to external borrowing to bridge fiscal gaps. Just recently, the government sought a $1,5 billion (R27 billion) loan from the World Bank to aid economic recovery. If approved, this would be the single largest World Bank loan South Africa has obtained.
While these loans provide short-term relief, they add to the mounting national debt, leading to higher future repayment obligations and the potential for austerity measures.
Shifting the burden to citizens
In light of these self-inflicted challenges, the proposal to increase VAT by 2% emerges as a contentious solution.
While it may generate an estimated R58 billion in additional revenue, this approach disproportionately impacts low- and middle-income households, exacerbating existing inequalities. It is imperative to explore alternative fiscal strategies that do not unduly burden the citizenry.
Special Economic Zones (SEZs) and tax incentives for exporters
China’s economic transformation has been significantly propelled by SEZs, which have attracted foreign investment and boosted exports.
Research indicates that SEZs have led to an 8% increase in average wages for local workers, alongside a 5% rise in the Consumer Price Index (CPI). To replicate such success, South Africa could enhance its existing SEZs by offering robust incentives, including tax holidays and infrastructure support, to attract global manufacturers and stimulate employment.
Liberalising labour laws to boost employment and investment
Flexible labour markets have been instrumental in fostering economic dynamism in countries like the United States and the United Kingdom.
By introducing more adaptable labour regulations—such as permitting short-term contracts and streamlining hiring and firing procedures—South Africa could create a more business-friendly environment. This approach may encourage both domestic and foreign investments, leading to increased job creation and economic growth.
Enhancing tax compliance and broadening the tax base
Improving tax compliance can significantly boost revenue without raising tax rates. Estonia serves as a prime example, where the digitalisation of tax administration has enhanced compliance and increased revenues. The country’s e-services have simplified tax processes, making it easier for taxpayers to fulfil their obligations.
South Africa could benefit from investing in modernising the South African Revenue Service (SARS) and implementing stricter enforcement measures to reduce tax evasion and broaden the tax base.
Privatisation and public-private partnerships (PPPs)
Divesting from underperforming SOEs through privatisation or establishing PPPs can alleviate the financial burden on the state.
Japan’s privatisation of its national railway system, for instance, led to improved efficiency and profitability. Similarly, South Africa could explore partial privatisation of entities like Eskom and Transnet, attracting private investment and expertise to revitalise these sectors.
Stimulating economic growth through incentives
Encouraging economic growth expands the tax base and increases revenue. Ireland’s low corporate tax rates have attracted foreign investment, leading to economic growth and increased tax revenues.
South Africa could consider targeted incentives for small and medium-sized enterprises (SMEs), such as tax breaks or grants, to stimulate entrepreneurship and job creation.
The postponement of the budget speech reflects deeper systemic issues within South Africa’s governance and fiscal policy.
A short-term fix, such as increasing VAT, risks further economic distress for citizens, while long-term, sustainable solutions require structural reforms.
By focusing on tax efficiency, strategic privatisation, anti-corruption measures, business incentives and pro-growth policies, South Africa can generate revenue without burdening its citizens.
If minister Godongwana and the Government of National Unity truly aim to secure the nation’s financial future, they must prioritise bold economic reforms rather than resorting to quick fixes. The solutions are there—what remains to be seen is whether the political will exists to implement them.
Ismail Joosub writes on behalf of the FW de Klerk Foundation.
