The GNU’s record in delivering growth-promoting reforms is disappointing — this budget crisis presents an opportunity to change that. 

The rejection by the cabinet of the finance minister’s budget and its proposal to increase VAT by two percentage points was a crisis waiting to happen. The government has been living beyond its means for too long.

There is a R190bn crater in the three-year medium-term expenditure framework (MTEF) — the budget for next year and projections for the following two financial years — that needs to be filled. South Africans are already highly taxed and the government’s credibility as a provider of basic services is catastrophically low. The only option is to emphasise spending cuts.

The temptation to wish these painful choices away by promising reforms that will generate growth or reduce waste must be resisted. Hope is not a strategy the Treasury can work with.

Unfortunately, there are no easy options. The government must find large cuts and couple those with less regressive and damaging ways to raise additional revenue.

So, what could it do?

The government should consider withdrawing from its recently agreed public service wage agreement, which provides for an above-inflation 5.5% increase in the first year, and implement a 3.5% increase instead. If it did this, and if wages grew at CPI over the following two years, the government would save R100bn over the next three years.

The GNU should change procurement practices — like set-asides and localisation requirements — that raise procurement costs. This would lower the costs of supplying government departments and allow a reduction in the rate of increase of the goods and services budget. If this was limited to 3.5% a year in each of the next three years, instead of the intended 5.4% a year, the savings would amount to R50bn.

There are other, more targeted, cuts that could be made, though not all of them could be made immediately. The GNU could, for example, abolish the failing sector education and training authorities (Setas), which are projected to spend more than R80bn over the next three years.

State funding for small business is hopelessly ineffective and could be halved even as its impact was improved by allocating the remaining funds to private sector fund managers for investment in high-potential small and medium-sized businesses. We estimate that this could save at least R9bn over the MTEF with further possible savings if we include the reduction in staff.

The suggestion by the DA that a process be put in place to assess whether there are “ghost workers” in the public service is a good one. The government could incentivise this process by promising departments that find such workers that they can keep the savings in the first year to pay once-off bonuses to their actual staff.

There are many other low-impact government programmes that could be cut with little risk of negatively impacting on the country’s development. Putting in place a credible and urgent process for identifying additional areas of wastage and committing to achieving a target of some R40bn in cuts over the MTEF would help close the budget gap.

A small cabinet subcommittee consisting of members of at least the ANC and DA should be tasked with identifying other wasteful expenditures and motivating for additional cuts.

Our suggestions could fill the hole in the MTEF, but only if they are implemented immediately and we achieve the full savings available. This is unlikely to be possible, so the government will have to look for new revenue too.

The government should start by providing Sars with more resources immediately so that it can pursue tax evaders and tax debtors more effectively.

Depending on the actual revenue Sars can bring in as quickly as possible, the GNU has a few options. The focus should be on reducing targeted tax breaks, especially those whose benefits are highly concentrated among the better-off. This is much more reasonable than a regressive, politically destabilising rise in VAT.

Halving the medical aid rebate would return about R50bn to the budget over the MTEF. Halving rebates received by the automotive industry for tariffs paid on wholly imported vehicles would yield significant revenues too.

These steps would make a difference to the immediate crisis, but they are not enough. What the GNU needs is to get serious about growth. Pushing the country onto a higher growth trajectory is the only sustainable way to deal with the many development challenges and spending demands the government faces.

The GNU must enter into a growth compact as part of approving the budget. They need to agree that the day after finalising the 2025 budget, GNU ministers will map out a path to a plausible growth strategy. For the GNU partners, this needs to be a condition for passing the budget.

The GNU’s record in delivering growth-promoting reforms is disappointing. This budget crisis presents an opportunity to change that — and to win commitment to serious reform.

Without urgent and effective action, a failure to change tack will mean that this is the first in a series of budget crises that will become harder and harder to solve. The time for real change and action is now.

• Bernstein is head of the Centre for Development and Enterprise. This op-ed is based on a CDE document, “Dealing with the Budget crisis: CDE Recommendations”.

Article published by the Sunday Times.