Emerging from a 15-Year Period of Low-Growth Stagnation

In the next two weeks, we will receive our third budget of the year. It is vital for the country that this budget promotes growth. The budget process has been difficult due to underwhelming economic performance. To ensure sustainable public spending, we must generate government revenue through strong growth.

Currently, our politicians are facing tough choices, influenced by several factors, including the trade wars that began in February, when the economic outlook appeared more favorable. Our growth predictions have since declined, leading to lower tax revenue as businesses become less profitable and consumer spending drops. The budgeting situation now feels more precarious than it did two months ago.

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As I have mentioned in past letters, it’s crucial that the budget does not worsen the dire economic outlook by increasing debt levels. The National Treasury has worked hard to address the financial crisis we faced five years ago. Ratings agencies have recognized these efforts, improving our credit rating outlook. Our goal must be to reclaim the investment-grade credit rating we lost in 2020, as this would lower the government’s borrowing costs and benefit the economy. On the other hand, rising debt levels will compel investors to demand higher interest rates on government debt, consuming more tax revenue and stifling economic growth.

We are left with two main options: increase taxes to boost government revenue or reduce expenses. Politically, the National Treasury’s initial suggestion to raise VAT has faced strong opposition. We must either explore alternative tax measures or consider spending cuts.

Read: Budget 3.0 compels government to confront issues it postponed

The challenge for the Treasury is that there are limited options for tax increases beyond VAT. Although some political parties advocate for such increases, personal and corporate tax rates are already high by international standards. Raising these rates often drives individuals and companies to relocate their economic activities overseas.

Research from the Treasury indicates we might end up collecting even less tax if businesses move beyond our borders, leading to job losses. While suggestions to encourage the South African Revenue Service (SARS) to improve tax collection efficiency are well-intentioned, they are not a sound budgeting strategy. Those of us in business know that while spending money is easy, effective budgeting for income generation is significantly more challenging. Budgeting must be responsible, and depending on overstated tax collections is imprudent.

The only viable path forward is to reduce spending within our means. This is a politically sensitive matter, as it invariably leads to “losers.” No politician desires to be seen as limiting the government’s capacity. However, every year, new projects and spending initiatives arise, resulting in numerous entities, not all of which provide value for taxpayer money. When it comes to cutting expenses, we need mature and honest assessments of which government sectors offer real value, along with the political courage to make necessary cuts where they fall short. Although it is commendable that our budget is subjected to democratic examination, the national unity government and others in parliament must display the political strength to make unpopular decisions.

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There are many other strategies we can adopt to drive growth, one of our greatest assets being the partnership between business and government. I am looking forward to the upcoming meeting between organized business and the president this Friday. Our last meeting in January was fruitful, as we aligned on critical structural reforms. While we have made progress—from enhancing the electricity system to logistics—global conditions have changed. This was prior to the US election and tariffs. We initially targeted a 3% growth rate by year-end, but global challenges now make that target more elusive. Nevertheless, we must amplify our efforts to implement reforms that boost our economy’s performance, as the urgency is only increasing. We must carefully assess how opportunities have evolved and ensure our plans align with the current global landscape.

Read: The VAT issue was never solely about VAT

The budgeting situation demonstrates that growth is essential for our nation. We need to escape the low-growth cycle that has confined us for the past fifteen years. Achieving this will demand innovative and bold thinking, especially in light of the new global environment.

I look forward to working alongside business and government colleagues to tackle these challenges.

Busi Mavuso is the CEO of Business Leadership South Africa.

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