Godongwana’s third act: Another box office flop?

Typically, the third film in a series suffers from what is known as “franchise fatigue”, often delivering lower box-office returns. Expect the same from finance minister Enoch Godongwana when he delivers Budget 3.0 next Wednesday.

After twice dodging his main coalition partners to try to sneak through unpalatable VAT hikes, the finance minister has finally been forced to play nice, consulting with the DA and other opponents of the earlier versions.

The cabinet signed off on the revised budget on Thursday, Business Day quoted minister in the presidency, Khumbudzo Ntshavheni, as saying.

Investors, economists and taxpayers will be watching with morbid fascination to see what Godongwana has put together – sans the VAT increase. Scrapping the 0.5 percentage point increase proposed in March punched a R28bn hole in the government’s already leaky public finances for the 2025/26 financial year.

To plug that gap, Kabelo Moutloatse, a tax specialist at Latita Africa, says corporate tax might bounce back to 28% from 27% simply because “consumers can’t pay any more”.

The corporate tax rate was cut in 2022 to improve South Africa’s competitiveness. Even at 28%, we wouldn’t be out of the ballpark with our peers – Brazil sits at 34%, Nigeria and Kenya at 30%. Of course, we are still far above Ireland, which sits at a lean 12.5%, and the UK is at 25%, but needs must.

“It could slow down future investments from multinational companies,” Moutloatse tells Currency. “Businesses operate to generate returns for shareholders, so if taxes rise, they’ll look to cut costs, often starting with labour. We could see less hiring, or even job cuts, as companies try to protect their bottom line.”

Until now, the National Treasury has shown a reluctance to raise corporate tax, noting that it’s a less efficient way to raise revenue than VAT. South Africa already ranks 13^th out of 123 countries for corporate tax as a share of GDP – higher than the Organisation for Economic Co-operation and Development and African averages.

But there’s no room to hike personal income tax (PIT) either – not least because South Africans are well aware they’re getting precious little for their money as it is.

“Increasing income tax on low- to middle-income earners would be damaging,” says Moutloatse. “They’re already under pressure.”

If anything, that’s an understatement. A survey by credit-check company TransUnion for the first quarter shows that 38% of South Africans couldn’t pay at least one bill in full – up from 35% at the end of 2024. Some 59% are preparing for a recession by reducing spending.

The Treasury itself has admitted that raising PIT, the largest of revenue for Sars, could drive more tax avoidance.

Thankfully, the South African Revenue Service (Sars) is getting more muscle: it’s getting R3.5bn this year and an additional R4bn over the next two, to ensure it can do its job of collecting what it is owed better. Considering the revenue authority raised R8.8bn more than expected last year, the investment has already paid off.

“We need strong administrative capacity at Sars to boost collections,” says Moutloatse. He doesn’t expect to see an increase in the fuel levy.

What he, and so many others want, is a serious effort by government to cut costs.

Tough calls

Godongwana has pledged to act on more than 240 spending reviews conducted since 2013. Reforms include an audit to root out “ghost workers”, rationalising more than 100 public employment programmes, and merging some conditional grants. The aim: cut waste, eliminate duplication and redirect funds where they matter most.

With less revenue, the state will have to make tough calls – despite the pressure to boost infrastructure spending and improve essential services.

Bracket creep – the process in which Sars raises more revenue by not adjusting its tax rates for inflation – will claw back about R18bn in 2025/26. But that’s small change next to a 5.5% public sector wage hike that will cost R23.4bn, the cost of extending the Covid stress relief grant and increasing social grants above inflation at another R37.7bn, and the need to spend R46.7bn on maintaining the country’s infrastructure.

Still, given the belt-tightening, plans announced in previous iterations of the budget to hire more health and education workers may have to wait.

Investec Corporate and Investment Bank treasury economist Tertia Jacobs reckons that the finance minister will announce a formal spending review in October, when the medium-term budget policy statement is released.

For now, Godongwana will probably halve the increase in spending in Budget 3.0 to R30bn, Jacobs says.

Much has changed since February 19, when Godongwana first tried to table the budget – not least a tariff-induced global slump, and a serious downward revision of South Africa’s growth prospects. Treasury’s 1.9% growth forecast for 2025 will likely be revised down, since the International Monetary Fund now expects just 1% growth, compared with a 1.5% earlier forecast.

The extra money collected by Sars in the year to March 2025 may bring some minor relief. At the least, it could help narrow the budget deficit, which the Treasury last forecast would come in at 4.6% of GDP for 2025/26, to about 4.5%, Jacobs says.

That may offer some respite, as it means the government wouldn’t necessarily need to borrow more, or issue new bonds.

But the deeper issue may not be fiscal at all.

“This budget is more important for signalling the GNU [government of national unity] temperature than for any forecasts it may contain,” Bank of America (BofA) Sub-Saharan Africa economist Tatonga Rusike said this week.

BofA believes the Treasury may double the revenue gap to between R40bn and R60bn, while the country could lose up to 1% of its GDP, “requiring more serious spending cuts”, Rusike said.

“That would make it easier for major GNU parties to approve this budget in the short term,” he added. “They could then work towards more serious spending cuts for the October medium-term budget policy statement.”

In other words, with reforms stalling and the world shifting under our feet, Budget 3.0 may just be another can kicked further down the road.

Prepare for Budget 4.0: how to avoid cost cuts, ANC style.

_{Top image: Finance minister Enoch Godongwana. Picture: Gallo Images/Brenton Geach.}