Budget crisis: Two days to bust

With just two days to go before the budget is debated in parliament, the deepening standoff between the ANC and DA means there is no agreement yet between the two largest parties in the grand coalition government.

On Tuesday, parliament’s finance committee meets to debate the fiscal framework and on Wednesday, the full plenary session of parliament convenes – but the ANC has only 159 of the 200 votes needed to pass the budget. The DA, which has 87 votes, will not pass any budget that proposes an incremental hike in the VAT rate from 15% to 16% without significant concessions. 

But with the clock ticking, ANC spokesperson Mahlengi Bhengu-Motsiri says her party is confident an agreement will be reached in time. Speaking to journalists at the ANC’s national executive committee meeting over the weekend, Bhengu-Motsiri said the clash over the budget “doesn’t spell the end of this relationship” between the DA and the ANC in the government.

And she said the ANC will not initiate any dissolution of the government of national unity (GNU): “We’re not going to be the ones that do so as the ANC.”

Perhaps – but the ham-fisted handling of the budget may doom the coalition anyway. As it stands, the parties seem irretrievably far apart. While DA insiders have told Currency that now is the time to wring maximum concessions out of its larger partner in exchange for supporting a VAT increase, ANC insiders seem shocked at the audacity of the DA’s demands.

In particular, the DA’s proposal that a new committee be formed by President Cyril Ramaphosa and DA leader John Steenhuisen to create a “coherent economic growth agenda” has been hotly contested, with ANC leaders arguing that economic policy has to be crafted by the government, not just two parties in the coalition.

The DA’s demands went further, however. Besides an amendment to the Expropriation Act, it wanted a promise that tax will be reduced within two years, that new regulations on National Health Insurance (NHI) be withdrawn, and that tariffs on imported products not made in South Africa – such as steel – be eliminated. 

And, in a nod to Elon Musk’s Starlink, the DA wanted an agreement that communications minister Solly Malatsi be allowed to issue a policy directing that “equity alternatives” can be used in the technology sector. Musk has refused to bow to South Africa’s policy that communications licences will only be granted to a company with 30% local shareholding. But “equity equivalence” would allow Starlink to meet other social goals, without selling shares. 

Peter Attard Montalto, the MD of consultancy Krutham, says the coalition remains on a knife edge as a result of the standoff. “The DA is now in a corner since many of its demands simply cannot be met by the ANC, and the ANC seems to have no appetite to reverse course and admit defeat on VAT,” he says. 

For instance, the DA’s demand to remove import tariffs is too technically complicated to simply agree on now.

Ralph Mathekga, an independent political analyst, says it is possible, but not inevitable, that the budget crisis could lead to the end of the GNU. But he says the ANC is mostly to blame. 

“They proposed a budget without spending more time working with the DA on brokering a compromise and then they shop around for ways to pass this [budget] without the DA. So, if anyone is placing this thing at risk, it’s actually the ANC, which wants to continue business as usual, prioritising their own agendas without considering their serious partner within the GNU,” he says.

Mathekga says the ANC has done its best to avoid any “meaningful discussion” with the DA.

“Whenever the ANC goes outside the GNU to try to circumvent dealing with the concerns that GNU partners have, that is an opportunity cost; it’s a wasted opportunity because that effort should be placed within the GNU, where intense negotiations around what ought to happen should take place.”

He says that the ANC has cast around desperately trying to enlist the EFF and others without considering that the DA might be the least difficult to deal with.

A third way

So what happens if the budget is not approved this week?

Attard Montalto says nothing would come to a halt immediately – but the lack of approvals for future spending would see a slow grind towards austerity, as programmes are halted.

There is another way, which would seem, at this point, the better option for everyone. This would entail finance minister Enoch Godongwana proposing a third budget – only, this time, without any VAT hike.

This would allow the ANC to avoid compromising with the DA, and give Steenhuisen the political ammunition of being able to say the DA stopped a tax increase.

“It would be the easiest way out for Godongwana. It would also keep the government together, even if it has been deeply scarred by this whole process,” says Attard Montalto. However, he says, coalitions “can only work in the long term where there is compromise and a detailed written agreement”.

The DA’s gamble is that the centrists in the ANC realise that any collapse of the GNU will do untold harm to the economy, making the path back to an investment-grade rating more uncertain. During Jacob Zuma’s presidency in 2017, South Africa was downgraded to “junk” status by ratings agencies Fitch and Standard & Poor’s, and Moody’s later followed.

Last week, Moody’s said it still believed the ANC and DA would “reach a compromise, leading to an orderly approval of the budget”. But, it said, the more entrenched the disagreement becomes, the larger the cloud hovering over South Africa’s fiscal policy will be. 

And if the ANC has to rely on votes from outside the coalition to pass the budget, the more uncertain the GNU’s future will be, “increasing doubts about its ability to deliver on economic and fiscal reforms”.

But even if there is some final deal made to pass the budget, this ordeal will have created deep, long-term scars.

Other political parties that are not in the coalition have been quick to pronounce on the coalition’s imminent death.

Last week, Herman Mashaba’s ActionSA said it had told the ANC it won’t support the budget, after one of many meetings Ramaphosa’s party held in the past week to recruit backers.

“ActionSA has communicated its view that either the votes to approve this budget must come from the parties within the GNU, or a new government capable of passing a budget must be constituted,” it said.

It is sign of how fragile the coalition is that even the ANC is now speaking about the end of the union. There are some in both parties who would welcome that – but while this would help both parties score political points, it would be a disaster for the wider economy. 

_{Top image: John Steenhuisen (Gallo Images/Misha Jordaan); Julius Malema (Gallo Images/Sharon Seretlo) and Cyril Ramaphosa (Gallo Images/Frennie Shivambu).}