South Africa’s budget could see further revisions as political negotiations continue over a contentious plan to raise value-added tax (VAT), Finance Minister Enoch Godongwana said Wednesday.
Parliamentary opposition to the revised budget remains strong, despite the government reducing the proposed VAT hike from 2 percentage points to 1 point, phased in over two years. Major parties, including the African National Congress’ (ANC) main coalition partner, the Democratic Alliance (DA), remain opposed to tax increases, complicating efforts to secure the budget’s passage.
“There will be engagement which may lead to some amendments in the budget. It is the nature of the thing,” Godongwana told The Associated Press in an interview at his parliamentary office.
The budget has become a major test for the fragile coalition government formed after the ANC lost its parliamentary majority last year for the first time since the end of apartheid. Without the backing of at least one other major party, the ANC faces the risk of a budget impasse.
Godongwana said he was open to alternative proposals from lawmakers but stressed the need for fiscal responsibility. “If they scrap the VAT increase, which brings in 14 billion rand ($740 million) in additional revenue, they must then identify equivalent spending cuts,” he said.
Some lawmakers have suggested trimming the country’s bloated cabinet to free up funds. However, Godongwana argued that such measures would not generate the revenue needed to sustain critical services such as health and education.
The budget currently before parliament is one of the most contentious in years, and the government is unlikely to push for further tax hikes soon, he said. The plan projects public debt peaking in the next fiscal year, with the deficit gradually narrowing over the next three years.
Godongwana believes the budget’s fiscal trajectory would be viewed favorably by credit rating agencies, but acknowledged that its passage remains uncertain. “That’s a test we’ve got to pass,” he said.
The uncertainty has rattled investors, with the South African rand under pressure and government bonds underperforming emerging-market peers.
James Wilson, an emerging markets strategist at ING, said passing a budget with revenue-raising measures would be seen as “credit positive.” However, he warned that a breakdown in the Government of National Unity (GNU) coalition remains a risk if differences cannot be resolved.
“For now, this seems a difficult prospect, and a potential downside scenario remains of a complete breakdown of the GNU if differences cannot be rectified,” Wilson said.
Investors are awaiting further clarity on the budget’s final form. “We expect market noise to be manageable, but risks remain of flaring tensions,” Sonja Keller, an analyst at JPMorgan, said.
The budget debate is expected to continue in the coming days as parties attempt to find common ground on South Africa’s fiscal future.
