The finance minister will present the national Budget for 2025/26 later this week, along with projections for revenue and expenditure for next year and the year after.

While usually a seemingly procedural matter, the passage of this year’s Budget has been anything but routine. In fact, the last two iterations nearly toppled the government of national unity (GNU) and in effect provoked a tax revolt.

Although the National Treasury objects to this portrayal, the reality is unavoidable: the crisis arose because the February Budget committed to permanently expanding public expenditure, an approach that ran against Treasury’s longstanding stance.

Seemingly forgetting that his party no longer holds a parliamentary majority, the finance minister attempted to achieve this by raising the effective rate of personal income tax and increasing VAT to 17%. He appeared uncomprehending when these proposals were rejected.

The revised Budget didn’t fare much better. Despite scaling back spending increases and delaying some of the pain from raising VAT, opposition parties inside and outside the GNU still refused to accept the Budget. They reiterated what everyone knows to be true: vast sums are wasted due to inefficiency, mismanagement, and outright corruption in public finances and this should be dealt with rather than raising taxes.

So, what should Budget 3.0 look like?

The truth is that the minister has little room to manoeuvre. South Africa is already heavily taxed, and further increases would slow economic growth: because governments tend to use resources less efficiently than households and businesses, shifting resources from the latter to the former will often reduce output and growth.

Besides, recent events have shown that public support for additional taxes is virtually non-existent.

No room to increase borrowing

Nor is there any room to increase borrowing. The astonishing rapid rise in the value of outstanding debt and in the debt ratio mean that more borrowing constitutes a dire risk to faster growth. All of which leads to an overwhelming conclusion: it is imperative to curb the rise in spending.

That said, it is true that the minister also faces pressures to spend more on service delivery, social grants, bailing out state-owned companies and supporting the recovery of local governments. Some of this will require new spending, which makes it even more imperative to reduce wasteful spending. While difficult, this is indeed possible. Several options were proposed after the failure of the first Budget.

One suggestion is for the government to exit the public sector wage agreement, which guarantees an above inflation 5.5% pay increase in year one, and instead enforce a 3.5% rise. If wages subsequently grow at the rate of consumer inflation, and if personnel numbers remain constant, savings of R100 billion could be achieved over three years. Even factoring in some new hires for essential services like health and education, R60 billion could still be saved within the Medium-Term Expenditure Framework (MTEF).

The GNU should also commit to a swift audit of its payroll to eliminate “ghost workers” who fraudulently collect salaries.

Current procurement policies that artificially inflate state spending must be overhauled. Another suggestion for reducing spending is to address these inefficiencies.

If the state limited annual growth in goods and services budgets to 3.5% – instead of the 5.4% included in the previously rejected Budget – it could save R50 billion. These savings wouldn’t compromise service delivery if combined with a rethink of costly localisation mandates.

More targeted cuts

Further targeted cuts, though not immediately implementable, could include dismantling the sector education and training authorities (SETAs) and the National Skills Fund, which could save R80 billion over three years. Halving funding for small business initiatives, and transferring remaining funds to private funds specifically mandated to deliver and account for results in promoting successful small and growing firms, could save an additional R9 billion. This figure might increase if staff reductions in the Department of Small Business Development and the many other public entities supporting small business were implemented.

A small, focused, multiparty Cabinet subcommittee could identify a menu of other low-priority programmes. This team could be mandated to find an additional R40 billion in savings over the MTEF and ensure that the other cost-cutting measures were actually implemented.

Although budget reductions won’t solve South Africa’s broader crises, they can slow further decline. Real progress, however, requires a credible growth agenda. Thus far, GNU leaders have acted as if simply forming a coalition equates to a growth policy. It doesn’t.

There are actions that would signal a genuine commitment to economic revival. These include abolishing cadre deployment, slimming down the Cabinet, and appointing qualified executives and professionals to key leadership roles. Without these changes, structural dysfunction will continue to obstruct speedy and effective reform.

A business-led team should be appointed to audit major state-owned companies (SOCs), identify candidates for privatisation, and propose asset sales. Revised public-private partnership rules need to enable more private sector involvement in service delivery and the running of SOCs, boosting efficiency and easing the state’s fiscal pressures. A specialised, high-performance unit or department must oversee these reforms and ensure boards are competent, autonomous, and answerable.

The GNU also needs to focus on getting the National Prosecutions Authority to up its game with respect to dealing with major corruption cases and state capture enormously. To this end, the president should task a retired judge to assess the performance and leadership of the NPA, act on calls to suspend a senior regional director whom the head of the NPA has asked to be removed nearly two years ago, and guarantee the NPA has full access to the Zondo Commission records. Specialised corruption courts should be set up to expedite prosecutions and reduce case backlogs.

Underdelivered on reforms

If South Africa wants to build a more competitive economy with firms that can succeed globally, it must move away from shielding underperforming, entrenched companies. Instead, the government should drive productivity gains and lower the cost of doing business. The vehicle manufacturing sector’s generous subsidies should be reassessed. The automatic extension of collective bargaining agreements to firms not party to the negotiations must also be abolished so that small businesses, whose costs of complying with labour legislation are typically disproportionately high, are afforded a greater chance of growth and success.

So far, the GNU has underdelivered on reforms needed to unlock growth. It must urgently craft and implement a viable growth plan, beginning with a few bold steps – like those outlined above.

Given that the ANC cannot assume that Parliament will approve the new Budget, that approval should be conditional on the credibility and substance of both the cuts to spending and the design and implementation of a credible growth strategy. Without urgent and decisive action, this could mark the beginning of a succession of fiscal crises, each more difficult to resolve than the last.

A government demanding more taxes while squandering billions through inefficiency and graft lacks credibility. Why should taxpayers be asked to contribute more when so much is being wasted? What South Africa needs is decisive spending restraint and a compelling growth strategy – not endless tax increases and political concessions that sidestep the real challenges.

– Ann Bernstein is the executive director of the CDE.

This article publised on News24