Going for growth: Structural reforms needed for South Africa's economic recovery

Occasional Paper 5/2025

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M A Y 2 0 2 5

 Prof William Gumede

Former Programme Director, Africa Asia Centre, School of Oriental and African Studies (SOAS), University of London; former Senior Associate Member and Oppenheimer Fellow,   St Antony’s College, Oxford University; and author of South Africa in BRICS (Tafelberg).

Abstract

The danger of a global economic downturn because of the wide-ranging tariffs introduced by the US, the 30% tariffs specifically on South African exports, the cutting of development aid the prospect of the country being cut from African Growth and Opportunity Act market access, means that the country is looking at a potential massive economic meltdown. A break-up of the current Government of National Unity will unleash further political and economic turmoil.

The National Treasury’s GDP growth forecast of 1.9% in 2025 is based on optimistic assumptions and fails to reflect the country’s ongoing structural obstacles to growth, including its public service, governance, policy and debt woes. The solution will not be found in doggedly following the same strategy of consumer and welfare-led growth, which puts pressure on public finances, and stagnates economic growth and job creation. It will also not be found in the pockets of already struggling citizens or the 12% who pay tax – increasing VAT and tax will simply dampen consumer confidence. No-one should be expected to pay more for broken systems that only continue to deteriorate. Rather, the answer lies in the governing ANC genuinely tackling corruption, advocating for merit-based competence, strengthening the rule of law, protecting property rights, and letting go of populist and ideological anti-growth, anti-business and anti-job-creation policies. A new growth path must be based on boosting infrastructure, manufacturing, mining, agriculture, and renewable energy. And it must be collaboratively led by a partnership between the government, private sector, civil society and professionals. The solution is not new, but it is becoming ever more urgent to action.

Introduction

If South Africa (SA) stays on its current economic policy path, or becomes more economically populist, and if it is unable to strike a compromise deal with the United States (US), it is unlikely to get even the 1.9% GDP economic growth predicted by the National Treasury in the 2024/2025 Budget.

The Treasury’s economic strategy to lift economic growth focuses on maintaining macroeconomic stability, implementing structural reforms, building state capability, and supporting growth-enhancing public infrastructure investment (Godongwana, 2025).

The National Treasury predicts real GDP growth of 1.9% in 2025, an upward revision from the 1.7% projected in the 2024 Medium Term Budget Policy Statement (MTBPS). Over the medium term, economic growth is projected to average 1.8%. The past decade has seen the economy grow only 0.8% per year (Neethling, 2025). Whereas, the country’s population has been growing at 1.5% per year.

The Treasury growth forecasts assume higher investment, recovery in household consumption, declining inflation, moderately rising employment, improving household balance sheets, and easing structural constraints on growth. However, the Treasury growth forecast appears to be overly optimistic (Bloomberg, 2025a).

The finance, trade, and agriculture sectors have in recent times contributed positively to GDP growth (Gumbi, 2025). However, contractions in manufacturing, energy, transport, and government services have undermined growth.

The Treasury does not appear to consider the continued structural obstacles to growth, such as the continued lack of state capacity because of public service, state-owned entity (SOE), infrastructure and municipal failures, caused by corruption, incompetence, and the many anti-growth policies (Jooste, Liu & Naraidoo, 2013). High levels of business regulation also undermine growth.

Moreover, global uncertainties threaten economic growth. US President Donald Trump has unleashed widespread global tariffs, including 30% against South Africa, and has cut development funding to the country. The US’ withdrawal of development aid – significant amounts of which were going to state, public, and civil society institutions – has left a big hole in South Africa’s public finances.

On 4 April 2025, US Congressman Ronny Jackson also introduced the US-South Africa Bilateral Relations Review Act of 2025, which calls for a full review of the bilateral relationship between the US and South Africa. It insists on sanctioning senior South African government and ANC officials who support US “adversaries”.

The Budget estimates a revenue shortfall of R16.7 billion in the 2025/2026 year. The Treasury revenue estimates are based on expected infrastructure investment, while there is very little meaningful new infrastructure built that would justify such an optimistic infrastructure-led revenue. Furthermore, the structural hurdles undermining infrastructure development include corruption, ineffective SOEs and development finance institutions (DFIs), ideological opposition by many ANC groups to involving the private sector in service delivery, the Expropriation Law (which undermines property rights), many anti-business laws, and potential domestic and global economic turmoil unleashed by the US President Donald Trump’s wide-ranging global tariffs against allies and adversaries alike (Shalal, 2025).

The Treasury revenue estimates are also overly optimistic – built on misplaced growth forecasts (Neethling, 2025). US tariffs will push up inflation and interest rates in emerging markets, including South Africa, and worse, will lead to a global economic downturn. Low global growth means lower demand for South Africa’s minerals and products. The unprecedented overhaul of global trade caused by the Trump administration will negatively impact on business and consumer sentiment, spending and investment, dragging down global GDP growth. There is also a real possibility that the US may unleash sanctions against South Africa, and individual ANC leaders, for long-standing anti-Americanism.

The ANC’s insistence on governing as if it is the sole majority-party, rather than it being part of a multiparty Government of National Unity (GNU) – which entails involving partners in decision-making, appointments, and policymaking – is threatening to break up the current GNU, with the real danger that the Democratic Alliance will exit. This will plunge South Africa into political turmoil. Add to this the US administration’s 30% tariffs against South African exports and its cutting of development aid to the country, and South Africa will be thrusted into a massive economic crisis.

The National Treasury’s forecasts are also based on unrealistically favourable macroeconomic outlooks, misplaced assumptions that there will be improved investor confidence, a stable supply of electricity, continued interest rate drops, and that South Africa will become a declining risk premium.

The reality is that South Africa’s business environment remains uncertain. A positive business outlook is one of the reasons for the Treasury and others’ positive economic forecasts, based on the assumption that the Government of National Unity following the May 2024 general elections would bring political stability, which would be the impetus for economic reform and, in turn, boost private investment and GDP growth (Bishop, 2025). However, as will be discussed later in this paper, the ANC, governing as if it is still the majority government, and not a multiparty GNU government, adopting ANC party policies without consulting partners, is putting the GNU at risk, undermining political stability. SA’s fallout with US President Donald Trump’s administration will also negatively impact on the economy, and on the country’s political stability. 

Policy instability, infrastructure bottlenecks, and public service and SOE failures have undermined business confidence, investment flows, and lowering of the country’s risk profile (Jacobs, 2025a). State infrastructure SOEs, in power, logistics and transport – key to the economy – have undermined the economy’s expansion. They have undermined trade exports. The severe loadshedding has been reduced, however, parts of the economy had already collapsed, with business closures, which means that the return of power has not boosted economic activity. The country has seen declining real per-capita income, persistent unemployment, pervasive poverty, and one of the highest inequality rates in the world. Productivity has also declined.

The Treasury’s national expenditure estimates are also understated. Given the lack of political will to tackle the structural impediments to growth, such as poor governance, lack of professionalisation in the public service, and corruption, it is very likely that new bailouts for SOEs and DFIs will be required. New laws, policies and regulations that are motivated more by ideology, populism, and wishful thinking, rather than pragmatism and cost-benefit analyses, and that will be opposed in courts, will further increase expenditure.

South Africa is facing the real possibility of a debt crisis. Government’s gross debt is now projected to stabilise at 76.2% of GDP in 2025/26. However, government does not include SOE debt in its debt projections, even though that debt is likely to increase, given the lack of political will to tackle the causes of SOE and government failure: political cadre appointments, captured preferential black economic empowerment procurement, and government reluctance to hold failing SOEs – which are managed by political cadre appointees – accountable, for fear of alienating ANC party factions.

South Africa needs to build and fund a R390 billion expansion of the national grid so it can connect more power plants. South Africa’s electricity transmission network is owned by Eskom. Eskom provides more than 80% of South Africa’s electricity. It has neglected the maintenance of plants, and has not build enough new ones, and the two built, Medupi and Kusile, announced in 2007, ran eight years late and beyond budget. It was planned to cost R163 billion, but the likely final price is now more than R460 billion. Both Medupi and Kusile are still not functioning at full capacity.

Eskom plans to build 14,218 kilometres of power lines over the 10 years. This is three times the capacity it has built over the past decade. Eskom also have to increase its transformer capacity six-fold. Given the fact that Eskom struggled to built Medupi and Kusile, its capacity to build new infrastructure is in question. Eskom plans to source from the capital markets after the 2026 financial year to finance new transmission infrastructure. It plans to a mix of equity and debt. ANC leaders have insisted that the state lead these infrastructure projects, rather than the private sector (Bloomberg 2024).

The Treasury revised down the contingency reserve, which is currently sitting at R21.6 billion over the medium term, a wholly inadequate sum to mitigate the risks of unforeseen crises – now a real possibility for South Africa, given the factors raised above.

Consumer and welfare-led growth

Much of the economic growth over the past decade came from consumer spending (Hausmann et al, 2022). Unless other areas of the economy lift, household consumption is expected to drive economic growth in the immediate future. In fact, consumer spending likely prevented South Africa from sinking into a recession last year (Thukwana, 2025). It makes up around 60% of local GDP, and so, raising value-added tax (VAT) could dampen consumer confidence – and drag down economic growth (Jacobs, 2025b; Qwelani, 2025).

STANLIB economist Kevin Lings calculated that 138% of South Africa’s economic growth over the last 10 years has come from retail spending, with a significant proportion of that going to imported items (Lings, 2025). Mining and manufacturing have declined, and as a result, so to have their employment statistics and foreign exchange earnings.

A sizeable proportion of consumer spending is through state welfare grants – South Africa has a whopping 28.7 million people on welfare grants, and only 7.4 million personal income taxpayers. This means that 44% of the country’s population is on social grants, and it depends on 12% taxpayers (SASSA, 2025). This undermines the country’s fiscal sustainability. It means that increases in social development come without increases in tax revenue. Even worse, it comes with increases in the state’s wasteful expenditure, revenue leakages, misallocated state capital, and capital flight – due to the combination of corruption, state and SOE incompetence by political cadre-appointees, and anti-growth policies. 

Welfare-led growth is unsustainable, as it puts pressure on public finances, and stagnates economic growth and job creation. Public debt continues to rise, with debt servicing now the largest expenditure in the Budget. State capacity and infrastructure delivery are not improving, because of the same issues of corruption and incompetence by political cadre-appointees. South Africa’s tax base is concentrated in a narrow band of high-income earners, who are highly globally mobile. Domestic anti-growth policies, continued state failure, corruption, and incompetence will force them to leave to other domiciles. Furthermore, global economic downturns – as a result of the worldwide impact of the US government’s global tariffs – will negatively impact on the incomes of high-net individuals (Goldman Sachs, 2025).

In the last quarter of 2024, manufacturing shrank 0.6%, mining dropped 0.2%, and construction fell 0.4%. Trade grew 1.4% and finance 1.1%, according to Statistics South Africa (Stats SA, 2023). For 2024, as a whole, growth rose 0.6%. Withdrawals under last year's “two-pot” pension reform had increased household spending towards the end of the year. Sixty-one percent (61%) of consolidated non-interest spending over the medium term is allocated to the social wage. This is not sustainable in the long-term.

South Africa's economy saw modest growth in the fourth quarter of last year, helped by a recovery in agricultural output. Agriculture expanded 17.2% in the fourth quarter of 2024 on the back of increased activity in field crops and animal products (Thukwana, 2025). However, agriculture is heavily influenced by climate change, extreme weather events, and anti-growth policies. The Expropriation Act, which allows for expropriation of property without compensation, will undermine agriculture investment certainty.

South Africa’s manufacturing industry continued to decline (Pule, 2023), dropping as a percentage of GDP from 21% in 1994 to 12% in 2021, meaning the country is deindustrialising. Manufacturing employment at the end of 2022 declined by 12%, compared to 2009. Between 2005 and 2021 the manufacturing industry lost 309 000 jobs, according to Stats SA. High levels of crime, power outages, infrastructure decline, no sustainable industrial policies, but rather, restrictive regulations, state failures, and a poor economic environment caused mainly by government, has led to this sector’s decline.

Although mining has carried the South African economy during difficult times, it has also consistently declined since 1994 (Chamber of Mines, 2015). The downward trend has been masked by commodity booms. Since 1994, South Africa’s mining output has broadly decreased by 0.4% annually, with gold decreasing by 85% during that period. The decline is not as a result of market conditions, but rather, it is due to power collapse, regulatory failures, corruption, capture of empowerment programmes and policies, and administrative incompetence in the departments overseeing mining (Parker, 2025). Incompetence, corruption, and lack of transparency has led to a massive backlog of exploration and mining permits – resulting in loss of investment (Jacobs, 2024). 

More recently, local ‘development’ mafias and “zama zamas” have captured mining operations, leading to the informalisation of the mining sector. Typically, like in all other sectors, year after year, government have promised beneficiation, processing, and value-add product development – which has come to nothing. In 2014, South Africa had 35% of Africa’s exploration budget; now it has only 7%, meaning the future development of the country’s mining is imperilled (Miller, 2025). Mining companies have been deterred from investing in greenfield projects, focusing on maintaining current operations.

The gold industry, the bedrock of South Africa’s modern development, is the most symbolic example of the decline. Until 2006, the country was the world’s largest gold producer. South Africa has now dropped to eighth, with production down 80% over the past 35 years. China is now the largest producer. The gold workforce used to be over 500 000-strong. It now has under 94 000 employees. Switzerland is currently the world’s gold trading centre, with the largest refineries, which naturally should have been South Africa. The Bank of England stores many countries’ physical gold reserves, which bring these countries investment, employment, and revenues. South Africa’s decline into corruption, incompetence, and poor planning means that it is not seen as a holder of other countries’ gold. Paul Miller (2025) writes that South Africa “has lost two decades of new geological knowledge that could have been used to attract investment, support new discoveries, and develop the industry”. 

In the 1990s, the Johannesburg Stock Exchange (JSE) had around 850 listed companies. This has dropped to under 300, including some companies that have dual listings (Van Cuyck & Ahmed, 2024). The last few years have seen fewer large iconic companies emerging. And some of South Africa’s historic companies have been taken over by foreign companies or are the subject of takeovers. The de-listings are partially the result of the cost of regulation, compliance, and reporting, but also because of a difficult economic environment (Pask, 2024).

Based on data reported by the exchange operator, the JSE, 2023 was the eighth year in a row that foreign investors dumped South African equities, taking the total since 2016 to $53 billion. Foreign investors have been cautious of South Africa’s high corruption, high crime, anti-business policies, infrastructure collapses, and power outages (Bloomberg, 2025b).

The Expropriation Act, the introduction of the National Health Insurance (NHI), and the fallout with the US – unless rectified with more pragmatic policies – are likely to slow down growth in 2025. Before the Expropriation Act and fallout with the US, the economy was predicted to modestly accelerate in 2025, as a result of an envisaged recovery in real household incomes caused by low inflation and falling interest rates boosting consumer confidence. However, this sentiment has been turned on its head. A continued fall-out between South Africa and the US will likely increase inflation – and the Reserve Bank is likely to maintain interest rates, rather than reduce them, which will undermine consumer confidence (Steenkamp, 2019).

Graph 1: National Treasury’s estimates of individuals and taxable income for the 2024/25 financial year.

Constraints on growth

South Africa’s democratic, political, economic, and rules-maintaining institutions have deteriorated – which has contributed to the country’s economic decline. Property rights are vulnerable. Rule of law in many parts has collapsed, the lower courts are inefficient and policing ineffective. Corruption is systemic. State capacity in many parts of the public services, among state-owned entities, and local government has been eroded. Crime is out of control. The state cannot efficiently enforce laws, rules, or policies. Infrastructure has collapsed in many areas. Many sectors of the economy, such as public transport, mining, and construction, have become informalised. The country has been deindustrialising.

Given this grim picture, an external economic shock, such as a prolonged fallout with the US Donald Trump administration, will have a disproportionately debilitating impact on the South African economy. The obstacles to most of these are political, social, and patronage-based, rather than technical, which is harder to reform. The political culture of the country has made corruption, incompetence, and misbehaviour acceptable – if it is done by those who share a similar colour, party, and ideology. Standard Bank Chief Economist Goolam Ballim rightly argued recently that while many of the constraints to growth “are largely technical, crime and corruption involve significant social elements which cannot be engineered or mechanically altered”, but needs political will from ruling elites (Jacobs, 2025a).

The International Monetary Fund (IMF) ranks South Africa as the most difficult place to do business globally among 49 countries in the IMF’s ease of doing business index (IMF, 2025; Jacobs, 2025b). The IMF highlights excessive regulation and government inefficiencies that hinder economic growth. It argues that halving SA’s restrictive business regulations relative to its emerging market peers could increase medium-run output by 9% and boost employment (IMF, 2025).

Gross fixed capital formation, which is an important factor of investment in capital assets, has regularly fallen (Sachs, 2021). The weakness in capital investment points to ongoing uncertainties in the business environment, as investors remain wary of policy instability, infrastructure bottlenecks, and economic volatility. Policymakers underestimate the impact of state failure, corruption, incompetence, and anti-growth policies on the economy, reducing revenue and undermining business confidence.

Lack of inclusive compromises on key policies, the NHI, the Expropriation Law, apparent refusal to renegotiate aspects of the Basic Education Laws Amendment (BELA) Bill to make it more inclusive, and perceived anti-American foreign policies have caused investment, capital, and skills flight.

In a VAT-increase scenario, businesses are likely to pass on the costs to consumers, which will, in turn, drive up inflation. This means that any rise in VAT is unlikely to bring in revenue as envisaged by the Treasury, as it would depress other parts of the economy (Gumede, 2014, 2025). In a study unrelated to SA’s VAT debate, the World Bank reported that over-reliance by emerging markets on VAT to generate revenue slows GDP growth, as it reduces household consumption – the effects are even worse in countries with high inequality levels (Tanzi & Zee, 2001).

South Africa saw high interest rate hikes during the period leading up to and including 2022 and 2023. Recent repo rate reductions, including the latest lowering of the repo rate by 25 basis points, have been marginal, at best. South Africa’s household debt is high, with the debt-to-disposable income ratio at a high 61.6% in the fourth quarter of 2023. Fuel prices have risen 12% year-on-year. If the government insists on also increasing value-added tax, it will undermine the purchasing power of consumers, spiking any economic recovery (National Assembly, 2025). 

The Reserve Bank will have to review the policy of inflation targeting. State and state infrastructure failure is a significant contributor to inflation, as citizens have to use private companies to deliver ‘public’ services because the state has failed to deliver effective policing, education, energy, and health. This means that South Africans pay double: taxes for the state and state infrastructure services that are not being delivered, and taxes for private public services. Businesses then increase prices for products and services to factor in state failure.

But runaway administrative prices – which is the prices of products, services, and utility rates set by state-owned entities, government utilities, and municipalities – also contribute significantly to inflation (Gumede, 2022). Administrative prices are either set directly by state entities, or are strongly influenced by them, rather than by market forces. In normal private markets, where there are competitors to provide products and services, the price and quantity of these are set by the mechanisms of demand and supply. Prices for products and services in such open markets are usually forged depending on the demand for them, the availability of supply, and the multiplicity of providers from which to choose. However, goods and services provided by government entities are often supplied through monopolies with no competition, and customers have no other alternative than to get cheaper or better-quality products elsewhere. The government entities can then set prices at arbitrary levels, even if the quality of these products and services is poor.

The business model of most government agencies is based on increasing prices to make up for increased costs and revenue losses, rather than using market-related pricing – as is the case with Eskom, where prices are increased even if demand declines, and the quality of supply drops (Gumede, 2022). Crucial infrastructure SOEs, such as Transnet, which are monopolies, also often set prices that are disconnected from the quality, cost, and market absorption rate of services they provide.

The quality of government entities’ services, products, and aftercare services often does not reflect the prices they charge. Municipalities often set rate, water, and refuse prices at levels unrelated to those that equivalent private sector establishments would charge, but without any concomitant standards in service delivery. For example, the Transnet National Ports Authority issued a tariff increase of 19.74% for the 2021/22 financial year. In 2003, the South African Reserve Bank warned that administered prices, specifically by SOEs such as Eskom, Transnet, and Telkom, were fuelling runaway inflation.

Furthermore, the regulatory processes involved in setting prices for government services and products are woefully ineffective. Regulation is meant to correct government market failures, as in the case of ineffective price setting by state entities, which have no competition, by ensuring that they set prices more realistically (Gumede, 2022).  

South African Reserve Bank Governor Lesetja Kganyago recently said the country’s 25-year-old inflation targeting regime is out of date and might be inhibiting faster growth and making the economy less competitive (Mutizwa, 2025). The inflation targeting framework helped lower interest rates from above 20% in 2000 to 7.5% now, and helped reduce macroeconomic volatility. The government adopted the inflation targeting regime in 2000, when it was set at between 3-6%. “The South African target is now rather dated, reducing our competitiveness and opportunity to generate faster and more sustainable growth,” Kganyago said. There will have to be a review on what is an optimal inflation targeting perimeter given South Africa’s structural rigidities, state failure, and the rapidly changing global macroeconomic policy trajectory.

Graph 2: Foreigners have sold South African stocks (JSE, Bloomberg).

Infrastructure neglect

Deteriorating infrastructure has undermined new investment, industrialisation, and growth. Infrastructure has declined because of corruption, mismanagement, maintenance neglect, underinvestment, and lack of long-term planning (Jacobs, 2025c). In fact, most of the infrastructure SOEs, such as Transnet, Eskom, and the waterboards, are in disarray. And many municipalities, the key infrastructure developers, are marred with corruption, incompetence, and poor planning.

The same can be said for the myriad of state infrastructure development plans and forums, including the Reconstruction and Recovery Plan and initiatives such as Operation Vulindlela, which have become virtual talkshops. Structures – such as the National Logistics Crisis Committee and Investment and Infrastructure Office – set up to play an oversight and coordination role, and provide governance over infrastructure, have not been able to provide the coordination, direction, or accountability promised (Lightfoot, 2023).

The breakdown of infrastructure drives up inflation, just as state, SOE, and policy failures do, as it drives up prices, the cost of living, cost of business, and erodes savings and deters future investment. The Reserve Bank has warned that the breakdown in infrastructure threatens the stability of the financial system.

Loadshedding, for example, has caused not only the loss of lives, but of businesses, capital, skills, employment, and investment. It has contributed to South Africa’s low-growth path, possibly taking away up to 3% of possible growth. South Africa needs around R150 billion per year just to replace the destroyed infrastructure, let alone build new infrastructure.

“The sustained deterioration in critical infrastructure poses direct operational risks that could disrupt the functioning of the financial system,” said the Reserve Bank in its latest Financial Stability Review. “While electricity availability appears to be gradually returning to historical trends, other critical infrastructure such as the supply and quality of water and transport infrastructure – especially rail, port and road networks – continues to degrade.”

Nedbank’s Chief Economist Nicky Weimar rightly said that after decades-long lack of investment in developing and maintaining infrastructure, the country’s economic infrastructure has imploded (Jacobs, 2025c). This means “our general supply curve is at a very low level. Even if demand accelerates, the moment it starts to strain supply, prices go up, interest rates go up, demand slows again.” Sadly, as Wiemar stated, if South Africa lifts growth to 3%, the power outages will return as there is not enough energy capacity to sustain the growth.

Restoring energy is a critical structural reform that is urgently needed. Unfortunately, reforms have been opposed by powerful interest groups who are benefiting from the energy crisis. As part of the structural reforms, the private sector has to partner – again, there is strong ideological opposition by some groups in the ANC and opposition party spinoffs from the ANC to private partnership in delivery. The energy reforms will have to focus on bringing on board renewable energy, cleaning coal in the way the Japanese are doing, bringing on board biofuels as Brazil has done, investing in gas development – whether in SA or in neighbouring countries – boosting energy grid infrastructure, and cleaning up Eskom, the state energy utility.

Current power infrastructure does not support higher growth

South Africa’s power grid built during the apartheid-era is centred around coal-power stations and the north of the country, which delivers power to the country’s main economic heartland in what is now Gauteng. Renewable energy currently comes mostly from the Cape areas – the Northern, Western, and Eastern Cape. Integrating the coal and renewable energy grid points, as well as potentially new energy sources such as biofuels and gas, is crucial to sustainably solving SA’s power problems.

The grid infrastructure of the country at the moment is not enough to handle rising energy production. The government announced a grid infrastructure expansion that would include over 14 000km of transmission lines and new substations. The problem is that many promises of infrastructure have been made in the past – with little delivery, due to a lack of state capacity, the manipulation of empowerment policies, and preferential procurement to give contracts to politically connected businesses who do not have the capacity.

The construction of new lines and substations is proceeding at a snail’s pace. The lack of transmission infrastructure is undermining attempts to bring new electricity on board. An example that after calling for bids that would double wind-power purchases from private contractors, the government did not award any of the contracts because it was not possible to connect the projects to any transmission infrastructure. Raine Adams, an analyst at fund manager Allan Gray, wrote in a note (2024) to clients that grid shortages pose a risk to the estimated 66 gigawatts of wind and solar plants that are already at various stages of development. As a structural reform, key strategic projects must be excluded from empowerment, preferential procurement conditions, and given on capacity merit.

Water provision has also plunged. Many of the water infrastructure SOEs, municipal entities, and boards have fallen into disarray. The provision of water in many of South Africa’s cities and towns has deteriorated to such an extent that many citizens are without water for long periods during water outages. South Africa’s freshwater sources are under threat of wastewater contamination. Many state waste water treatment works (WWTWs) are collapsing across the country, threatening ecological disaster in surrounding areas (Thorne, 2025a).

Water expert and environmental advisor Anthony Turton told BusinessTech: “The simple truth is that WWTWs are slowly rendering the country’s drinking water unusable. Without sounding dramatic, South Africa is slowly committing ecocide – national suicide by poisoning its own drinking and crop production water” (Thorne, 2025b).

The lack of reliable water has also caused the flight of businesses, investment, and skills and increased inflation, unemployment, and has undermined growth. “Load shedding has been supplanted by the water security crisis, which poses a similar if not greater threat to the quality of life and economic prospects of all South Africans,” said President Cyril Ramaphosa in his 2025 January 8th statement.

Transnet, the state-owned logistics giant responsible for South Africa’s ports, rail, and pipelines is, like Eskom, a major contributor to the country’s low-growth path. Transnet has a R136 billion debt burden. Its inefficiencies are causing bottlenecks at ports and limiting rail freight, undermining trade. It costs the economy over R1 billion per day. S&P has placed Transnet on credit watch, cautioning that the SOE’s cash flow is not likely to improve fast enough to stabilise its debt levels. Transnet has been burdened with governance issues, political appointees, corruption in procurement and ideological policies from government. It undermines South Africa’s competitiveness; increases prices, inflation, business collapse, and unemployment; and has undermined growth.

Investec Chief Economist Annabel Bishop calculated that Transnet’s lack of capacity to meet demand has reduced GDP growth by around 3% per annum. “This is likely to remain the major limitation on GDP growth this year for South Africa, with modest inroads made on capacitating Transnet only expected to add a per cent to growth, as South Africa’s GDP lifts by 1.8% y/y in 2025,” according to Bishop. Because of the decline of the railways, due to lack of maintenance, corruption, and mismanagement, Transnet estimates it needs to invest R200 billion to restore the railways back to capacity.

It will be a waste of money to invest in Transnet without bringing in merit-based management, cleaning up procurement by exempting the organisation from preferential procurement rules, and discarding ideological objections to having the organisation fully partnering with the private sector in delivering infrastructure services. Transnet needs a social pact between itself, the private sector, civil society, and professional organisations to co-deliver services and clean up the organisation. It is estimated that Transnet’s poor performance cost the economy R353 billion in 2023.

South Africa’s failing infrastructure SOEs and Development Finance Institutions are constraints on growth

The Government’s Reconstruction and Recovery Plan identified infrastructure development as a key vehicle for poverty alleviation, job creation, and economic growth. However, currently South Africa’s SOEs, particularly the infrastructure ones, are a major structural constraint on growth. The country’s state DFIs are similarly in crisis and lack the capacity and funding to significantly accelerate infrastructure development funding.  

Thanks to corruption, incompetence, lack of capacity, and high debt levels, they are not able to manage any significant infrastructure build. They have been unprofitable, with large debts, and are in financial distress, having to regularly receive bailouts. According to the Department of Public Enterprises, between 2012 and 2023 the debt levels of the largest 10 SOEs rose by R313.6 billion. Government had to bail out these SOEs with R318.1 billion during that period.

The Treasury projected contingent liabilities at R1.17 trillion in 2025/26, mainly due to SOEs. Unless there is serious action taken to tackle the political interests behind the governance failure, corruption, and inefficiencies of SOEs, the debt-to-GDP trajectory could worsen.

Fixed investment by infrastructure SOEs fell 50% between 2013 and 2023 – where they invested 3.5% of GDP in 2013, this dropped to 1.6% of GDP in 2023. Just to get back to the 2013 SOE fixed investment levels, SOEs must invest around R134 billion. Investec has calculated that not only must SOEs bring their fixed investment levels to the 2013 levels of R134 billion; they need to invest an additional R240 billion to get to a 5% of GDP target.

Furthermore, in total, SOEs need to spend R1.75 trillion over five years to overcome the infrastructure neglect and simultaneously bring on board new critical infrastructure. Rationally, SOEs do not have the competence, the balance sheets, and the capacity – given their high debt levels, and many have their procurement captured by interest groups. The private sector will have to be brought on board on a large scale to deliver infrastructure.

The infrastructure SOEs and municipal entities will have to be prioritised for reform. The structural reforms to turnaround infrastructure SOEs must include merit-based appointments – with no preferential procurement – performance contracts with employees, and linking salary increases and benefits with performance. Where infrastructure SOEs obviously do not have the capacity, they must partner with the private sector to co-deliver services or fully outsource to the private sector to deliver (Ter-Minassian, 2017). 

Graph 3: State infrastructure performance (Nedbank, Eskom, Stats SA & SARB, 2025).

The 2024/25 Budget

On 12 March 2025, the Minister of Finance, Enoch Godongwana, delivered the National Budget Speech, following a postponement on 19 February 2025. Controversy has centred around the proposed fiscal measure to increase the value-added tax (VAT) rate by 0.5 percentage points in 2025/26, followed by another 0.5 percentage points in 2026/27, which will result in a 16% VAT rate by 2026/27. The 2025 Fiscal Framework and Revenue Proposal with the 0.5% VAT increase was voted in on 2 April 2025. The Democratic Alliance (DA) is taking it to court.

The DA, many ANC members, and civil society organisations are opposed to this, saying it will negatively impact poor households – and that ways can be found to generate revenue elsewhere, such as cutting public sector waste, mismanagement, and corruption. Pushing for taxes to overcome revenue shortages is the wrong strategy. SA has reached the ceiling of raising taxes (Gumede, 2014, 2025). The state – owing to corruption; incompetence; state failure; growth-reduction populist policies such as the NHI, Expropriation Bill, and anti-American foreign policies; marginalisation of minorities and large parts of SA’s diverse society, political views and ideas – has lost the credibility to get SA’s relatively smaller taxpaying citizens and corporates to pay more taxes, as taxpayers cannot see value for money when it comes to the taxes they are already paying. 

Within the ANC there have been two views on taxes over the past decades: popular among the masses, the first is to raise taxes for the ‘rich’. This view argues that the country’s well-off are under-taxed and that taxing the ‘rich’ is a lesser form of wealth tax, and importantly, taxing the rich will mean less electoral erosion for the ANC. The second view is the VAT option, because that is seen as spreading the tax over larger constituencies and is not ‘direct’. However, this tax is seen as more electorally damaging as it disproportionally impacts the working and lower middle-classes. 

The ANC development model has been to increase taxes to recover losses caused by state inefficiencies, mismanagement, corruption, and ideological and populist policies; at the same time the government has cut capital spending, and entrepreneurial, technology, research and innovation budgets, while increasing social development budgets (Gumede, 2025). This is the wrong approach to fill revenue gaps. The savings should rather be made by decreasing state inefficiencies, mismanagement, corruption, and ideological and populist policies. However, the reality is that tackling these issues is politically difficult, as it would mean taking on powerful interest groups within the ANC and government – which could cause disruptions in the party. According to the Laffer Curve, there is a tipping point where increasing taxes will be so onerous that revenue will decline as people try not to pay taxes (Trabandt & Uhlig, 2011; Wanniski, 1978). Obviously, a high tax-to-GDP ratio can be argued for if there is a quality return for the taxes – better public services, reduced incompetence, and more accountability.

South African Revenue Service Commissioner Edward Kieswetter (2025) rightly argues that higher tax rates do not automatically result in increased tax revenues. Kieswetter says taxes must be seen by the public as being “equitable”. If not, it undermines trust and inadvertently hampers compliance and revenue collection (Kieswetter, 2025).

The focus overwhelmingly should be on keeping taxes as they currently are or reducing them, while aggressively increasing state efficiency, cutting corruption, boosting competency – which is at the heart of performance – and stopping wastages that occur on account of captured empowerment programmes, captured procurement, and the deployment of politically connected but incompetent public sector and SOE officials. There has to be better capital allocation by the state to prioritise growth sectors. State capital allocated as part of fiscal responses to boost economic sectors often does not reach its intended targets, diverted to patronage, captured empowered programmes, or simply not given to those who can make a critical difference. A case in point of the latter was the government’s Covid-19 loan guarantee scheme to rescue struggling businesses, which saw less than 10% implementation by June 2021 (Hausmann et al, 2022). 

Despite a new three-year wage agreement to reduce budget uncertainty, managing the public sector wage bill remains challenging. A sustainable approach to remuneration and productivity is needed to align with long-term fiscal plans and ensure effective service delivery. However, public service trade unions are important ANC constituencies – and the party has been very unwilling to take them on by reducing the public sector wage bill.

Similarly, given the failure of the state, the private sector, civil society, and professionals must be brought in to help the state co-deliver public services and infrastructure. However, there is an ideological objection by some ANC groups to involving the private sector, civil society, and non-ANC professionals in delivering public services or infrastructure. This is a structural impediment which slows down the adoption of policies that would enhance public-private partnerships.

The simplification of public-private partnership regulations is good news, as attracting private collaboration will be essential to solving some of the country’s largest challenges, such as water, rail, and electricity.

The Budget reported that South Africa’s 2024/25 budget deficit was R31.8 billion higher than projected in the 2024 Budget Review, as revenue collection fell below expectations. The government’s gross debt stock is expected to increase from R5.69 trillion in 2024/25 to R6.81 trillion in 2027/28. South Africa’s net loan debt – gross loan debt less cash balances – will increase from R5.47 trillion to R6.70 trillion over the same period. The Budget predicts SA’s gross loan debt to stabilise at 76.2% of GDP in 2025/26.

In the 2025/26 fiscal year, the government will pay a total of R424.9 billion to service debt, which translates into R1.1 billion per day to service its debt.  Servicing debt is now larger than social welfare. Finance Minister Enoch Godongwana said debt redemptions were R73.8 billion lower than estimated a year ago because the government’s bond-switch programme continued to exchange shorter-dated for longer-dated bonds. This meant, according to Godongwana, SA’s gross borrowing requirement, consisting of the budget deficit, maturing debt, and Eskom’s debt-relief deal, dropped from a projected R457.7 billion to R415.7 billion for 2024/25 – 6.1% to 5.6% of GDP.

The Budget says that debt will gradually decrease – and debt services will decrease after this fiscal year. This is very optimistic. Debt is unlikely to stabilise while the underlying factors that contribute to debt remain. Furthermore, as Efficient Group Chief Economist Dawie Roodt has pointed out, South Africa’s debt burden is larger than the official debt numbers presented in the 2025 Budget. He said this is because the National Treasury did not account for the government’s obligations and liabilities, including the approved guarantees for state-owned enterprises (SOEs) or the risks posed by municipalities’ debt to Eskom. Roodt has strongly argued for the Treasury to include both explicit and implicit debts in its outstanding debt estimates – which is currently not the case. Explicit debt is officially recognised in government accounts and includes government borrowings and guaranteed loans. Implicit debt is not recorded as debt in financial documents but represents expected future financial obligations – guarantees for SOEs, such as Eskom and Transnet, and municipal debts are part of these.

The fact that South Africa’s debt portfolio is weighted to domestic lenders, appears to have lulled many into complacency. If the business environment continues to decline, investors could sell and move their capital to foreign assets, which will make SA’s fiscal position worse. In the past few years there has been a rise in borrowing from the international development finance, which has increased since 2020. 

The problem is, opposition to the structural reforms needed to reduce debt levels, the deficit, and increase revenue is mostly political, ideological, interest-based, and from corrupt groups – with strong powers to resist reforms. Many of the structural reforms being implemented so far have focused on technical aspects, capacity-building, and increasing or reducing budget allocations. Many of the non-technical, but rather political, ideological, interest-based, and corruption factors that drive the level of the budget deficit, the performance of the public service, and SOE and municipal liabilities, are not easy to tackle.

Many parts of the public service, SOEs, municipalities, and management of state infrastructure are beset with governance challenges, largely because of politically appointed, but incompetent leaders, widespread corruption, the capture of procurement policies, mismanagement, and ideologically-based regulations, policies and priorities – the solutions to these are mostly political. And up until now, there has been very little apparent political will to tackle these sources of governance challenges. Political appointees to the public service, SOE and state infrastructure management, vested political interest, ideological and corrupted policies have led to state failure, have undermined growth and the flourishing of private companies, the formation of new business, and the attracting of investments – undermining revenue generation.

Graph 4: Gross tax revenue as a proportion of GDP (National Treasury & SARS).

Assumptions underlying the Budget

The challenge is how to bring sustainability to South Africa’s public finances. Key to doing so is to reduce debt, increase revenues, improve the efficiency of the public service and SOEs, increase productivity, and lift economic growth.

To start, there has to be a political acceptance that growth is top priority. Many ANC politicians do not genuinely think growth should be at the centre of economic policy, arguing wrongly that to do so will be promoting ‘neo-liberalism’. Policies that undermine growth will have to be jettisoned. This means the NHI Bill must be reined in, and a middle-way must be cobbled together that introduces a dual public-private health system, not a fully nationalised state health system. The NHI Bill as it currently stands is threatening the sustainability of public finances, destroying value, will cause capital and skills flight, all of which will undermine growth. The Expropriation Law is also a concern as, firstly, it goes against the Constitution, which allows for expropriation of property for public interest purposes, but with compensation. And secondly, as it is, the Law undermines property rights.

State sectors that are catalytic to growth will have to be prioritised (Schröder & Storm, 2020). State failure is a big reason for low growth. In the short-to-medium term, state departments and SOEs that are fundamental to growth should be prioritised for professionalisation, corruption should be slashed, and competence increased, to increase productivity and lift performance. At least senior leadership of these organisations must be merit-based. Consequence management must be enforced. And preferential procurement requirements in growth-prioritised state sectors must be lifted.

Critical infrastructure SOEs and DFIs should be prioritised for reforms – and for public-private partnerships to co-deliver services; or where state institutions are so hollowed out, to hand over delivery to the private sector. Laws, regulations, and rules that obstruct public-private partnerships should be jettisoned.

Key growth catalysing municipalities and metros should also be identified and prioritised for professionalisation, corruption curbing, merit-based administrative appointments and procurement. In areas of deep failure in critical state departments and SOEs that have no prospect of immediately being turned around because of vested political, ideological, and trade union interests, the private sector must be brought in to deliver. Essentially, this will mean putting SA on a two-track structural economic reform programme: prioritising the key state growth sectors for reform, while outliers will come along.

There will have to be a review of South Africa’s inflation targeting monetary policy framework, given the continued structural rigidities, state failures, and the changing global economy – as it is, after 25 years, under new political and economic conditions – corruption, state failure and low-growth, potentially undermining economic growth.

Key catalytic growth sectors will have to be prioritised. Manufacturing remains important – its declining trend needs to be reversed. Agriculture is critical. It is important that land reform is not populist, emotional, ideological and revenge-driven, but rather, that it focuses on securing food; fostering an agricultural, manufacturing, processing, and technology industrial hub; and fostering related artisan, technical, and research skills. This would mean partnering with the private sector to bring back artisan programmes, agricultural technical institutions – especially in the rural areas – and fostering agriculture technology. 

Lack of rule of law is also a constraint on economic growth. There has to be rule of law. Crime has to be tackled seriously. And the police, prosecuting and justice system have to be reformed to bring merit-based competency, fight corruption, and partner with business, civil society, communities and professionals. Insecure property rights is another binding constraint on growth. Incidents where property, development projects, businesses and houses, mines, and transport assets are hijacked by mafias, whether “zama zamas”, taxi organisations or political groups, will have to be brought to heel visibly. Sadly, property rights, rule of law, and rules-based social behaviours – without which economic growth cannot take place – are not taken seriously by many of South Africa’s political formations, trade union groups, and other formations.

Despite the usually superficial statements that mining is critical, very little has been done to encourage its expansion. South Africa has not taken any serious actions to beneficiate, process, or refine minerals. Mining laws, policies, and rights allocations are in many cases captured by politically connected figures, mafias, such as the “zama zamas”, and trade union interests – which is yet another obstacle to growth.

Graph 5: Total SA Mining Output (Minerals Council South Africa & Stats SA).

Impact of leaving AGOA, possible sanctions

The US introduced a 30% tariff increase on all South African imports into the US, announced by US President Donald Trump on 2 April 2025. The US accounts for 9% of South African exports, and over 600 US companies have investments in South Africa. South Africa exports 21.3% of its goods to the European Union (EU). 

Losing preferential access to the US market through the African Growth and Opportunity Act or increased tariffs for South Africa’s products, will make these less competitive in the US market (Baskaran, 2024). Even the alternative of negotiating a bilateral trade deal with the US could take a long time to unfold. 

Mining exports have protected South Africa during difficult economic periods. For now, some South African minerals – platinum group metals (PGMs), coal, gold, manganese, and chrome – are excluded from the US tariffs. However, diamonds, steel, iron-ores and concentrates, metal jewellery, granulated slag from the manufacturing of iron or steel, will be subject to the tariffs (Arnoldi, 2025). South Africa’s exports of mineral products and precious metals to the US came to R65.3 billion in 2024, with PGMs accounting for 76.3% of the total.

However, all this can change, depending on whether South Africa continues with its current old-style, counter-productive engagement with the Trump administration – not accepting accountability for long-standing anti-Americanism, for threatening South African and US property, land, and business interests through the Expropriation Act, for persistently marginalising minorities in state governance, and for blame-shifting the SA-US fallout on right-wing Afrikaner groups (Botes, 2023).

A 30% tariff on SA products will make exporting to the US unviable. It will have heavy negative direct and indirect economic consequences. Products immediately impacted include fresh produce, wine, and motor vehicles. The 30% will reduce SA exports, employment, household incomes, and government revenues. Upwards to 200 000 jobs may be threatened, and a reduction of up to 2% of GDP is likely.

If SA can retain the African Growth and Opportunity Act (AGOA) preferences, while non-AGOA SA products are under the increased tariffs, it may be less devastating. Nevertheless, whether the 30% tariff includes or excludes AGOA products, it will impact on the mining, manufacturing, and agriculture sectors. The mining and agriculture sectors have in recent times been the economic saving sectors for SA. And both these sectors have multiplier impacts on other industries, which means if these sectors are negatively impacted, it will also have negative spillover effects on downstream sectors.

Political actors and groups who reckon South Africa can quickly pivot from the US market to alternatives, such as BRICS, have a case of wishful thinking, as a loss of the US market cannot be immediately replaced. Of course, BRICS and non-BRICS countries in Asia, the Middle East, Latin America, Africa, the European Union, and Canada, offer alternative trade options and could help mitigate US losses. However, for example, Russia’s trade with South Africa represents only 1.7% of the country’s total trade, exports and imports with the BRICS economies in 2022. Globally, Russia was the destination for only 0.2% of South Africa’s exports during the same time (Siegle, 2023). Russia contributes less than 1% of the foreign direct investment in Africa (Siegle, 2023).

A transition to new markets cannot be achieved overnight. Worse, SA’s state trade negotiation capacity is currently possibly at its weakest – most over-ideological, least agile and opportunity-minded – since the end of apartheid. State capacity has been eroded in state trade structures, as in other parts of the state, through cadre deployment, exclusion of minorities, and informalisation.

China may be South Africa’s largest trading partner by volume, but it mostly takes South Africa’s raw material, not manufactured products – it has trade barriers, but sends manufactured products to South Africa, which displaces local jobs. US companies manufacture in South Africa, meaning they have larger multiplier impacts. The Chinese government often demands exemptions from local labour, empowerment, and affirmative laws. US companies generally actively institute diversity, local supplier development, and affirmative action and social responsibility programmes – meaning they stimulate the economy in many other ways too, than only direct trade.

The US also provides development aid, not only through the United States Agency for International Development (USAID), but also through other state departments, through sub-programmes from US organisations receiving development aid from US non-governmental organisations and philanthropic foundations – directly funding South African state agencies, NGOs, and the private sector. China does not offer developmental aid – state, private, and philanthropic – on such a scale.

Neither will the African Free Trade Area be an immediate alternative. Thirty-four out of 54 African countries are in some or other conflict, and systemically unstable, which has made African free trade virtually impossible to implement on scale. African economies do not have the diverse, sophisticated consumer wealth that the US offers.

Graph 6: Debt Service Costs, Source Budget Review

US Trump administration tariffs heralding structural changes in the global economy

The wide-ranging tariffs introduced by US President Donald Trump will push structural changes in the global economy. In recent times, the world has seen mainly cyclical changes. US President Trump, on 2 April 2025, announced reciprocal tariffs that include all nations, not just a smaller group of 10 to 15 countries with the biggest trade imbalances. This new tariff plan has been dubbed "Liberation Day". US tariffs will push up inflation and interest rates in emerging markets, including South Africa, and lead to a global economic downturn.

South Africa may be part of the global formations such as BRICS and the G20, however, its economy has become marginal. South Africa’s economy is a small one, the size of which has declined dramatically since the end of apartheid – from being in the top 20, to the late 30s, it is now, sadly, in the same league as African economies such as Nigeria, while South Africa’s emerging peers Poland, Saudi Arabia, and South Korea have all risen to become $1 trillion GDP economies. There is a real danger that South Africa may lose out to most in the structural changes the global economy is undergoing, because many of its political leaders still operate ideologically in the Cold War era, are anti-business, continue to insist on anti-growth economic policies, and lack the resolve to tackle systemic state failure – which is an impediment to growth.

A fallout with the US will increase South Africa’s risk premium as an investment, capital, and development destination. It will result in global companies being reluctant to commit capital in South Africa. Many US companies and institutional investors may pull the plug. Companies will also be reluctant to pledge long-term capital because of the uncertainty. It will raise the cost of South Africa’s debt. It will also put pressure on the rand currency in relation to the US dollar.

On 4 April 2025, US Congressman Ronny Jackson introduced the US-South Africa Bilateral Relations Review Act of 2025, which calls for a full review of the bilateral relationship between the US and South Africa. It calls for sanctioning senior South African government and ANC officials who support US “adversaries” (Fraser, 2025), which include China, Russia, and Iran. “South Africa has brazenly abandoned its relationship with the United States to align with China, Russia, Iran, and terrorist organizations, a betrayal that demands serious consequences,” said Jackson. “This legislation ensures we conduct a comprehensive review of this supposed ‘ally’ while also holding accountable any corrupt officials.”

The South African Reserve Bank (SARB) released its Financial Stability Review (FSR) in 2023, highlighting the likely impact of secondary sanctions on the financial stability of South Africa. The rand would be under pressure – and would be fragile and volatile (Soobyah & Steenkamp, 2019). The country’s risk premium would increase. There would likely be large selloffs of local bonds. During the 2023 fallout between South Africa and the US over evidence from the US that a Russian ship was on-loading weapons, local companies suffered heightened scrutiny by offshore banks when they made payments to foreign suppliers in the recent weeks, undermining their ability to do business.

If there are sanctions against South Africa, US dollar payments via the international payment system, SWIFT, could be sanctioned, as is the case with Russia. According to the Reserve Bank, secondary sanctions would mean a tightening or termination of correspondent banking relationships and increasing costs of cross-border payments. This would also directly impact countries in the South African Development Community (SADC) region using South African banks for cross-border transactions. The rand is part of the 18 currencies that participate in the Continuous Linked Settlement (CLS) system – regulated and supervised by the Federal Reserve Bank of New York. The SARB says that should secondary sanctions be imposed on South Africa, the CLS may remove the rand from the system, which would then expose South African banks to principal risks when settling foreign exchange transactions in CLS currencies, increasing settlement risk for South African banks.

It will also make it difficult for SA banks to make or receive any payments from correspondent banks in US dollars. The US may expand sanctions to include payments in euros or pounds. All of this will make it onerous to finance any trade or investment flows. The Reserve Bank says sanctions “will be catastrophic for the South African economy and has the undeniable potential to trigger a financial crisis”. It says the South African financial system will not be able to function if it is not able to make international payments in US dollars – which will impact on the economy and financial markets. Over 90% of South Africa’s international payments, of all currencies, are done through the SWIFT international payment system.

South Africa is heavily dependent on foreign savings, capital, and investments (Loewald, Faulkner & Makrelov, 2019). The country’s current account deficit is widening. In the past few years, South Africa has experienced massive foreign investment outflows. Grey listing of the country because of high levels of corruption, illegal financial flows, and ineffective state policing; anti-business and anti-growth policies and laws; state failure; and infrastructure collapse have increased these outflows. Sanctions against South Africa will only heavily inhibit further foreign investment flows.

Graph 7: SA Mining, Manufacturing and Retail Activity (Stats SA & Stanlib).

Interventions needed to lift GDP growth

South Africa needs to and can grow itself out of its economic struggles. Economic growth is critical for reducing the debt-to-GDP ratio (Dybczak & Velculescu, 2025). Fiscal consolidation needs economic growth (Maupa, Makwiramiti, Padayachee, Nemataheni & Paine, 2019). It needs political will. It needs competent public institutions to oversee the reform programme. It needs a clear, coordinated, pragmatic plan. If state performance is not improved, corruption not cut significantly, wastages through captured empowerment programmes not eliminated, and anti-growth policies not stopped, SA will have no choice but to drastically cut expenditure.

As mentioned, the ANC development model has been to increase taxes to recover losses caused by state inefficiencies, mismanagement, corruption, and poor policies. Related to that, the government has cut capital spending, entrepreneurial, technology, research and innovation, while increasing social development budgets. Although raising taxes for the ‘rich’ is popular among the masses – and will lead to less electoral erosion for the ANC – it should not be an option. In a similar vein, raising VAT would disproportionally impact the working and lower-middle classes. Clearly, increases in taxes cannot be justified when public service delivery declines, and incompetence, corruption, and lack of accountability continues to rise (Gumede, 2014, 2025).

It is very likely that the high taxes – combined with poor public services, high corruption, and incompetence – are now damaging to the economy (Gumede, 2014, 2025). The Katz Commission (1996) in its third report recommended the Treasury set a ceiling of 25% as the maximum tax-to-GDP ratio. The purpose of a tax ceiling would be to mitigate a negative outcome – if taxes are too high, they become damaging to the economy, as argued in the Laffer Curve proposition (Trabandt & Uhlig, 2011; Wanniski, 1978). National Treasury has rejected this ceiling proposal.

The warrants repeating: The focus overwhelmingly should be on keeping taxes as they currently are or reducing them, while aggressively increasing state efficiency, cutting corruption, boosting competency – which is at the heart of performance – and stopping wastages that occur on account of captured empowerment programmes, captured procurement, and the deployment of politically connected but incompetent public sector and SOE officials. There has to be better capital allocation by the state to prioritise growth sectors. State capital allocated as part of fiscal responses to boost economic sectors often does not reach its intended targets, diverted to patronage, captured empowered programmes, or simply not given to those who can make a critical difference. A case in point of the latter was the government’s Covid-19 loan guarantee scheme to rescue struggling businesses, which saw less than 10% implementation by June 2021 (Hausmann et al, 2022). 

The ongoing SOE and DFI crises remain threats to national fiscal sustainability, public service delivery, and growth (Williams, 2022). The public sector, SOEs, and DFIs will have to be genuinely professionalised. This means that merit in appointments and procurement must be introduced – at least at the SOEs and DFIs critical to growth. There has to be greater accountability and oversight over spending. There has to be an increased efficiency in government spending, eliminating wasteful expenditure and mismanagement. But there also has to be more efficient allocation of state human capital to priority growth sectors. Deployment, affirmative action without adequate skills, and trade union protection of poorly performing state employees makes efficient allocation of state human capital to oversee implementation of projects almost impossible.

The state will have to prioritise investments in infrastructure to support long-term economic growth (Lawrence, Eichenbaum & Rebelo, 2010). However, such initiatives must be in partnership with the private sector. There are many other viable non-tax revenue alternatives, including cutting corruption, inefficiencies, and waste – at least in the ministries and departments, SOEs, and DFIs critical for growth. Cancelling cadre deployment, preferential procurement at the ministries and departments, SOEs and DFIs is critical for growth.

Small and medium-sized enterprises (SME) should be the pillar of South Africa’s growth efforts. SMEs are estimated to provide close to 90% of all employment globally. For the past 30 years, South Africa's growth strategy wrongly prioritised essentially ‘big’ state-led growth, meaning getting the ‘big’ state to create jobs. Clearly, this was a flawed growth strategy. Because ‘big’ state became captured, appointments and procurements have often been made based on political affiliation or patronage, and it adopted ideological, populist, and anti-growth policies, causing the strategy to fail at delivering growth.

The interventions needed to lift GDP growth are largely political, social, and vested interest, rather than technical. Fiscal consolidation cannot happen without tackling these. If South Africa does not take a more reconciliatory stance towards the Trump administration, retaliation from them will undermine growth. The South African engagement with the Trump administration must be on the basis that the fallout with the US, unless resolved, may tank South Africa’s economy, at the worst possible moment, massively increasing deindustrialisation, dis-investment and de-skilling, which will deepen poverty, unemployment, and business closures.

A key structural reform needed is to bring in the private sector, civil society, and professional associations to help with public service delivery and tackle development, state, institutional, infrastructure, and policy failure.

The best way forward would be to negotiate a compromise through an SA Incorporated approach, which would involve not only the ANC, but also the Government of National Unity partners, organised business, civil society, non-ANC experts, and South Africans based in the US who are in Trump's inner circle. Critically, it is going to be important that the new SA ambassador to the US not be someone associated with the ANC, but could be drawn from the non-ANC GNU partners, a business leader actively doing successful business in the US, or a South African civil society figure, not associated with the ANC, but respected in the US, or a South African within the Trump circle based in the US.

It is crucial for the turnaround of the economy that the GNU partners with business, civil society, and professionals to form a kind of GNU+, to help provide new ideas, capacity, and energy to turn around the country’s broken state, broken economy, and broken society. Importantly, this partnership should be based on co-delivery, co-implementation, and co-ideas generation. It has to be real co-creation partnership, not government only seeking the help of business, civil society, and professionals in instances of full state collapse. Nevertheless, partnership is particularly important in mission-critical state, policy, and resource failures.

Conclusion

The Treasury’s economic strategy the past decade has been focused on maintaining macroeconomic stability, implementing structural reforms, building state capability, and supporting growth-enhancing public infrastructure investment. The Treasury’s 12-year fiscal consolidation strategy has failed to reduce debt-to-GDP and deficit ratios or the structural challenges, because these problems have their origins in politics, which is beyond the Treasury remit. In fact, the Treasury has found it hard to pursue fiscal consolidation, avoiding more debt, and cutting expenditure to keep public finances together.

However, the Treasury’s efforts have been undermined by the lack of political will in the governing ANC to genuinely tackle corruption, bring merit-based competence, strengthen the rule of law, protect property rights, and let go of populist and ideological anti-growth, anti-business and anti-job-creation policies. Furthermore, the Treasury is constrained by the lack of a conducive environment for job creation and investment. This is not the Treasury’s fault, as the national government is responsible for this. The national government has consistently fostered a hostile environment for business, investment, and job creation by not tackling the rule of law, corruption and incompetence, by adopting anti-business and anti-growth laws, policies and public stances.

Instead of infrastructure-led growth, South Africa got consumer and welfare-led growth, which is not sustainable. It is not possible to change the country’s growth path without tackling the structural inhibitors such as corruption, incompetence, state, SOE, DFI, and municipal failure, and anti-growth, anti-business policies. A new growth path must be based on boosting infrastructure, creating a manufacturing mining processing complex, especially around critical minerals, an agriculture industrial complex, expanding renewable energy, establishing a biofuels industry, expanding SMEs, and fostering new industries that South Africa lacks, but which the world needs. Such a new growth path has to be collaboratively led by the government, private sector, civil society and professionals.

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This report has been published by the Inclusive Society Institute

The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals.

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