Economists forecast increase in VAT or income tax to balance budget

Absent very significant increases in economic growth, all roads point to greater pressures on the National Treasury to increase various taxes in the upcoming budget.

This is the outlook by economists at law firm Nortons Inc Avias Ngwenya and Marylla Govender ahead of finance minister Enoch Godongwana's tabling of the budget on Wednesday.

They said the tabling of the budget comes as the economy can be best described as facing the perfect storm, with high levels of unemployment and low levels of economic growth.

The increasing social grant burden on the national fiscus, coupled with the very high debt-to-GDP ratio, has resulted in much-needed funds which could be used to facilitate economic growth leaking from the national fiscus. They said the debt-to-GDP ratio of 75% is clearly not sustainable.

South Africa’s economy is facing extremely high levels of youth unemployment, coupled with very low economic growth prospects, making new employment opportunities almost non-existent. In the fourth quarter of 2024, the official unemployment rate stood at an elevated 31.9%, with women and youth persistently more affected. Stats SA has indicated that youth unemployment (people aged 15-34) is about 59.6%.

They said the increased burden of poor performing state-owned entities has also placed the Treasury in an unenviable position of trying to manage an extremely constrained budget, while new challenges are on the horizon.

"Overall, something has to give as the existing budget is not sustainable."

Social development expenditure, which supports approximately 28-million South Africans, accounted for about R387bn in 2024/25. "This is only surpassed by learning and culture, which accounts for about R480bn in 2024/25. Other growth-enhancing areas of the economy such as economic development account for a significantly smaller proportion of the national budget (R255bn)."

After a recent Pretoria high court judgment that found that regulations limiting the access to the R370 per month social relief of distress (SRD) grant to only those who earn less than R625 per month is unconstitutional, they expected the social grant strain on the national fiscus will increase.

"With this judgment we anticipate that an additional seven to 8-million South Africans may qualify for the SRD grant. This would amount to the need to allocate up to an additional R36bn to grant recipients."

They also cited South Africa’s reliance on foreign debt to balance the national fiscus.

"Our current debt book sits at R5.2-trillion and expected to increase to R6-trillion in 2025/26. We currently spend about R382bn of our budget (2024/25 budget allocation) on servicing this debt.

"This figure has ballooned from about R100bn in 2014 and is now one of the largest budgeted items and far exceeds the amounts government spends on health (R272bn), community development (R265bn), economic development (R255bn) and general public services (R75bn)."

The economists said in the coming year, it was anticipated South Africa will need to increase its borrowings even more significantly to balance the national budget. The increasingly dire financial state of many state-owned entities (SOEs) was expected to continue to place a significant strain on the economy. "SOEs’ liabilities are significant and we estimated them at about R848bn."

Ngwenya and Govender said SOEs have continued to languish, are struggling to access capital markets without government guarantees and increasingly request bailouts to service debt and fund turnaround plans — which the Treasury previously noted was unsustainable.

"Overall, SOEs have continued to seek government bailouts with Transnet most recently having been reported as seeking an additional bailout similar to that which had been structured for Eskom."

They also noted that the looming water crisis in two of South Africa’s economic centres (Gauteng and KwaZulu-Natal) was expected to have dire consequences for economic growth.

"Gauteng and KwaZulu-Natal account for about 49% of South Africa’s GDP. As such, the ability of these provincial economies to function efficiently has significant implications for South Africa’s GDP growth outlook."

They said Gauteng has an estimated annual GDP of R2.8-trillion (or R7.5bn per day), while KwaZulu-Natal has an estimated annual GDP of R1.1-trillion (or R3.1bn per day). Combined they contribute about R10.6bn per day to South Africa’s GDP.

"Increased levels of water usage, ageing infrastructure and poor infrastructure maintenance, as well as poor management at a local government level, have been cited amongst the reasons for the water crisis facing these provinces.

"Even if just half of the businesses in Gauteng and KwaZulu-Natal are unable to function due to a lack of water, this would lead to a loss of R5.3bn per day."

Over one year (assuming water rationing for 20% of the year), the annualised loss would be about R387bn per year, they said. This would amount to about 10% of the GDP contributed by these provinces.

In circumstances where the Treasury forecast an average annual GDP growth rate of 1.6% over the next three years, a 10% contraction in Gauteng and KwaZulu-Natal’s GDP would lead to a contraction in national GDP figures estimated at -5%.

"The reality is water is a critical input into all business operations from manufacturing to retail and services sectors alike. This water crisis should sound alarm bells for South Africa’s economic growth prospects as, unlike power back-up and solar solutions, which have emerged as alternatives during load-shedding, similar alternatives are not readily available for most businesses during a water crisis." 

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