Godongwana cuts government spending to offset VAT shortfall

Finance Minister Enoch Godongwana has announced how the government will get the money that was intended to be collected from the value-added tax (VAT) hike.

Delivering his third budget speech in Cape Town on Wednesday, he said the shortfall that was supposed to be made up by the VAT increase will now be made up from reducing government spending over the medium term by R68 billion.

“Our focus going forward is threefold: balancing the budget through spending efficiencies, strengthening revenue collection, and giving expression to the medium-term development plan.”

Why cut government spending?

Godongwana said VAT will remain 15%, to show government’s commitment to listening to South Africans.

In his second budget, the minister proposed a VAT increase of 0.5% this year and another 0.5% next year.

He stated that the decision to cut additional spending was made without compromising the fiscal strategy of maintaining sustainable public finances. These reductions are primarily aimed at provisional allocations that have not yet been assigned to votes.

“Simply put, this means baseline allocations across all spheres of government remain largely unchanged.”

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What will the government cut?

He made reference to an open letter from Sarah Stein, a medical student at the University of Cape Town. The letter outlined the state of a public hospital and the emotional toll of working in a space without the basic resources needed to help people.

That letter is part of the reason he saw the need to address spending pressures to restore critical frontline services and invest in infrastructure, which is critical for improving access to basic services and lifting economic prospects.

The total allocated spending will amount to R6.69 trillion over the medium term. The budget also proposes additional spending of R180.1 billion, which he said is lower than the R232.6 billion proposed during the second budget.  

Breakdown of allocations

Godongwana gave a breakdown of how the R6.69 trillion will be allocated. The provincial education sector’s baseline for the 2025 MTEF is R1.04 trillion, and an additional R9.5 billion will be allocated over the medium term to retain teachers in classrooms and hire more staff.

An additional R10 billion has been allocated to the baseline, as announced during the budget on 12 March, to expand access to early education, which remains unchanged.

“This will increase the ECD subsidy from R17 per child per day to R24. The additional funding will also support increased access to Early Childhood Development (ECD) for an additional 700,000 children, up to the age of five years.

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More medical staff to be employed

Godongwana stated that the provincial health sector budget is R845 billion over the medium term.

“This budget will be increased by R20.8 billion over three years to employ 800 post-community service doctors, essential goods and services, and a reduction of accruals. This increase will also help the sector address personnel budget pressures.”

The allocation for 2025/26 has been increased from R1.8 billion to R3 billion for the Department of Defence.

“R1.4 billion is allocated to support the preparations for the upcoming local elections.

“R885 million of the allocation is for the Independent Electoral Commission and R550 million for the South African Police Service and the South African National Defence Force to maintain public order.”

Potential savings

He noted that SA’s economy has underperformed for the last decade, meaning less tax revenue was generated, but increased social spending, widened budget deficits, and accelerated debt accumulation were required.

“To be successful, our strategy of maintaining fiscal discipline while investing in growth demands that we prioritise high-impact expenditures.

“These are expenditures that deliver economic returns while eliminating inefficiencies, wastage and leakage that too often plague the government’s spending.”

Godongwana said the Treasury has reviewed more than R300 billion in government spending since 2013, with the aim of identifying duplications, waste, and inefficiencies.

They have identified potential savings of R37.5 billion over time through improved oversight and operational changes resulting from these reviews.

Closure of underperforming programmes

“Going forward, underperforming programmes will be closed as the 2026 MTEF budget process undergoes redesign.

“New reforms will target infrastructure planning and implementation across provinces and municipalities,” he added.

A data-driven approach to detecting payroll irregularities will replace the more costly method of using censuses. Godongwana said this initiative will cross-reference administrative datasets to identify ghost workers and other anomalies across government departments.

“Part of the goal of these initiatives is to also remove the regulatory burden on business.”

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