South Africa’s growth falters as policy issues mount
Struggles with stagnating GDP growth and budget disagreements are compelling South African policymakers to urgently address long-standing economic challenges.
In a nutshell
- Ongoing economic decline sees GDP growth stalling at below 1 percent
- The budget deadlock reflects deep divisions in the coalition government
- South Africa faces an urgent need for reforms
South Africa’s economy is struggling. For the past three years, the country’s gross domestic product (GDP) growth has been consistently downgraded. This downturn reflects policymakers’ reluctance to address persistent issues, such as infrastructure decay and fiscal strain, which have worsened over time and turned into a formidable challenge.
For the first time in 30 years of democracy, South Africa has hit a budget deadlock. This impasse has delayed the adoption of the national budget and exposed rifts within the coalition government, highlighting the difficulty of aligning a divided administration.
In February 2025, coalition parties involved in the Government of National Unity could not reach an agreement on funding government priorities. The primary source of disagreement regarding the budget is the National Treasury’s proposal to raise the value added tax (VAT) by 2 percentage points to 17 percent. According to the treasury, this increase would close the funding gap since the economy has been performing poorly, leading to a declining revenue base and the worsening issue of inadequate revenue collection.
The coalition’s failure to come to an agreement in February stalled the passage of the budget. In response, on March 12, 2025, Finance Minister Enoch Godongwana unveiled a revised budget to lawmakers, scaling back the VAT hike to a phased increase – 0.5 points on May 1, 2025, and another 0.5 points on April 1, 2026 – bringing the rate to 16 percent. However, the revised budget was also almost immediately rejected by the major political parties.
The budget stalemate is a wake-up call to the once-dominant African National Congress (ANC). The party has lost control over which national priorities should be financed to sustain the nation and its economy. Some have characterized this as a political power play by opposition parties intent on demonstrating that the ANC is no longer governing alone after the May 2024 national election. The situation, however, is more complex than it seems. The underlying causes of this budget crisis have been simmering for years, and their effect has only just begun to show.
The undeniable message is that the status quo can no longer be sustained. This situation urges policymakers to seriously address the systemic challenges that have been plaguing South Africa’s economy for years.
Rising deficit amid inefficiencies and misallocated spending
In the financial years 2023 and 2024, GDP growth in South Africa did not exceed the 1 percent mark, with the country achieving 0.6 percent and 0.7 percent economic growth, respectively. South Africa’s financial year runs from April 1 to March 31. Over the years, the ANC-led governments have largely overlooked recommendations for implementing reforms in the system. This includes avoiding necessary budget cuts to tackle the growing public sector wage bill. These pressures have intensified even as the government struggles to provide essential services such as electricity, water and vital infrastructure.
Over the last five years, sovereign rating agencies have urged policymakers in Pretoria to address these challenges in the medium term. While President Cyril Ramaphosa’s administration has acknowledged the need for budget cuts, progress in fulfilling these commitments has been limited.
The situation has worsened as South Africa’s state-owned entities, particularly the electricity behemoth Eskom and the rail and freight agency Transnet, have become the weakest links in an already struggling economy.
Poor management and a lack of necessary reforms have gutted Eskom. Its aging, poorly maintained infrastructure has left the company unable to provide consistent energy security in South Africa. Since 2007, the country has endured regular widespread power outages, known as load shedding. Meanwhile, Transnet, once a powerhouse in rail and freight, is a shadow of its former self, now notorious for its crumbling rail infrastructure and unreliable logistical services. This decline has driven many major companies to reconsider their operations in South Africa.
The budget stalemate is a wake-up call to the once-dominant African National Congress.
Municipal roads are crumbling, too, disrupting the steady logistics vital for economic productivity. The ongoing crisis in service delivery has reached a tipping point, causing more companies to hesitate to absorb the adverse effects on their operations and profits. Alongside the issues of unreliable electricity supply, the growing concern over water supply further highlights the diminishing ability of municipalities to effectively manage critical infrastructure.
Steel giant ArcelorMittal recently announced the closure of its long steel production plant in South Africa. The company cited insurmountable challenges, including an unstable energy supply and deteriorating rail infrastructure managed by Transnet. These issues ultimately led to the company’s decision to cease operations by April 2025. ArcelorMittal pointed to Eskom’s recent move to raise electricity prices by 12.7 percent for the 2025-2026 financial year as a contributing factor. This exit could negatively affect South Africa’s automotive sector, which has demonstrated resilience and has been a key driver of export growth in recent years.
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It may be hard to put a price on the cost of corruption in the economy over the past decade in South Africa. However, it is undeniable that it has diminished Eskom’s competitiveness and efficiency, continuing to stymie efforts to restore the company to its essential functionality. The situation is further complicated by the ANC-dominated Government of National Unity’s reluctance to reach an agreement that could transform Eskom into a catalyst for driving the economy forward.
Efforts by policymakers to involve the private sector have been, at best, lackluster, reflecting a lack of commitment in this area. The anti-corruption initiative pursued by the ANC within the government of national unity lacks firmness, often yielding to political expediency. Many tenders for major infrastructure projects remain questionable, failing to demonstrate value for money for taxpayers.
No room left for delayed reforms
Taxpayers are becoming increasingly skeptical of the government’s ability to act in their best interests, making the idea of a tax increase profoundly unpopular. This was evident with the proposed VAT hike. The tax increase lacks substantial commitments to reform the system, leaving many unconvinced. Counterproposals made by other parties in the coalition have been to reprioritize funds in the budget to ensure efficiency.
Furthermore, concerns have been raised regarding the bloated public sector workforce, with too many government departments placing a strain on national finances. Over the last three decades, South Africa’s public service wage bill has grown significantly, rising as a percentage of GDP from 5.6 percent in 1994-1995 to 10.4 percent in 2023-2024.
In past years, the government had the opportunity to implement reforms at a manageable pace. As things stand, however, this leeway has diminished. The budget impasse indicates that painful reforms will inevitably have to be made, no matter how challenging. It is clear that there is no more room to defer action; someone needs to step up and take responsibility.
With unemployment currently at a staggering 32 percent, many people are already suffering the harsh effects of policymakers’ reluctance to reform the system and find long-term solutions. If action is not taken soon, it will become increasingly difficult for the government to provide social support for vulnerable communities. A shift in strategy is essential, focusing on job creation by attracting investments and preventing the exodus of foreign direct investment.
Scenarios
Unlikely: A nonpartisan effort to carry out major budget reprioritization
Recognizing that the opportunity to avoid essential economic reforms is rapidly diminishing, the political parties within the governing coalition could come together to agree on these necessary changes, including significant budget cuts. This collaborative effort would adopt a nonpartisan stance, where the parties carefully consider how the current status quo affects both their constituents and potential investors. Such a scenario would require the ANC to embrace the reality that the party is no longer governing and must adopt a new budget framework. This is highly unlikely since the party appears more inclined to seek backing from radical leftist parties outside the coalition government just to push the budget through and maintain a business-as-usual approach.
A new path alongside the spirit of the coalition could mean that parties could commit to major budget reprioritization while also reforming critical state-owned entities such as Eskom and Transnet. By involving the private sector, they would restore confidence in investment opportunities. A thorough budget realignment will ensure that public spending delivers value for money.
Likely: Minor reforms will be made to the system; social tension will rise
Tensions regarding policy direction are likely to escalate within the coalition government as the dominant ANC continues to maintain its course. Minor adjustments to the existing system will continue until a breaking point is reached. This is already becoming evident with state-owned enterprises like Eskom and Transnet. Political parties, particularly the ANC, promote the notion that if they were to govern independently, they could address these challenges without interference from opposition parties.
The high cost of living and soaring unemployment will likely fuel social tensions across the country. As a result, crime rates could rise, particularly among the youth, many of whom remain jobless and face bleak employment prospects in the current climate. The economy will continue losing its competitiveness and productive capacity as South Africa becomes an increasingly less attractive investment destination.
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