Given the new paradigm of a hung Parliament, there appears to be a modest, but notable, opportunity to correct the longstanding democratic deficit present in the Budget process.
The deferred 2025 Budget Speech has finally been delivered and, as expected, given the new reality of a hung Parliament, it has brought to the fore the longstanding democratic deficit in the Budget process. After all, what delayed National Treasury’s proposed Budget to Parliament on 19 February was, in a word, democracy.
It has been a notable and strange quirk in the democratic era that Parliamentary involvement in the Budget process has remained passive in South Africa. The embryonic return of active Parliamentary decision-making regarding the imposition of taxes and the appropriation of public money should be welcomed as a positive development, particularly since the Budget is, at its heart, lawmaking.
This disruption to the Budget Speech has highlighted a number of aspects of the democratic deficit in this important legislative process, three of which I discuss in turn below.
1. The growing gap between policy choices, obligations and the Budget
In recent years, elected officials have been cautioned regarding the steadily expanding shortfall between policy choices made by the South African government and the eventual Budget proposed to Parliament.
Indeed, even in the eventual 2025 Budget Speech, Minister of Finance Enoch Godongwana actually acknowledged this existing gap, undertaking to let the Presidency lead future important pre-Budget discussions.
Professor Michael Sachs, formerly of the Budget Office in National Treasury, identified in the Public Economy Project’s 2023 Budget submissions the ever-increasing incongruity between policy priorities adopted by the President, representing the Cabinet as a whole, and the proposed Budget.
Specifically, Sachs highlighted that the public employment programmes identified as a central priority, including the President’s marquee Youth Employment Service (YES) programme, were “not included in the [proposed] Budget”.
This has not escaped the attention of the judiciary either, as noted in the recent Institute for Economic Justice (IEJ) judgment regarding the regulations circumscribing the Social Relief of Distress grant. Judge ML Twala importantly noted that the minister of finance, as the head of National Treasury, while being entitled to concurrent input on these regulations, could not “encroach on to the terrain of the [Social Development] Minister to make policy decisions” by predetermining the Budget and, therefore, capacity of the Department of Social Development.
Moving beyond the discretionary policy choices of the current administration, an even more problematic schism is the growing distance between actual obligations borne by the state and the proposed Budget.
Almost every department and organ of state is showing, to some degree, inadequate funding to match their legally imposed mandates. This breaches, in my view, a key principle of the Budget process, which is that the public money appropriated for a public function should be commensurate with the mandate assigned to that function.
It is illogical to set up departments for failure by deliberately under-resourcing the organs of state tasked with implementing state obligations. It is also something that will very likely ultimately be the target of a direct legal challenge in court.
This is not to suggest that National Treasury shouldn’t be playing an important facilitative role in the compilation of the Budget. Treasury is, in fact, tasked with this function of collecting budget needs from all corners of government, and then to assemble them to present an honest account of the resource needs of departments and other organs of state, when proposing a budget to Parliament.
As Justice Twala remarked in the IEJ judgment, “it is unthinkable why the government and National Treasury, in particular, should not plan and budget accordingly in order to fulfil [government’s] obligations in terms of the Constitution”.
In practice, however, National Treasury has de facto assumed the role of predetermining budgets for individual departments and for the government as a whole, as implicitly admitted by the minister of finance.
In part, this has occurred due to an all-too-pervasive misunderstanding of Treasury’s constitutional mandate. I note that in the wake of the delayed Budget, Minister in the Presidency Maropene Ramokgopa correctly sought further scrutiny of the role of Treasury in the Budget process and importantly has asserted that the proposed future spending should be prepared by government as a whole.
Minister Ramokgopa correctly acknowledged that National Treasury is the only national department to have its own constitutional mandate, but it is also important to interrogate what that mandate means.
My own view is that National Treasury is mandated to impose and manage the accounting measures to be used by government when implementing spending. One particular phrase buried within this mandate, namely “expenditure control”, has unfortunately often been misconstrued.
This component of Treasury’s mandate refers to oversight and management of current spending, which has already been appropriated by Parliament and enacted into law, rather than vesting it with the power to determine current or future government spending. This is clearly the case, as the Constitution expressly makes the decision to determine public spending a legislative function.
This issue would, of course, not be so harmful if Parliament had a track record of amending appropriations to meet the state’s obligations and pursue government policy.
2. Parliament’s reticence to amend appropriations
Dr Sean Muller, formerly of the Parliamentary Budget Office, in his review of the Budget process for the Parliamentary Monitoring Group’s assessment of the fifth administration, specifically drew attention to the fact that Parliament has problematically never substantively amended an appropriation.
Muller further drew attention to the fact that there is a notable gap in the capacity of Parliament and its available resources to appropriately amend money bills, including appropriations.
Deciding how much and on what to spend public money is a parliamentary function granted by the Constitution. As Muller suggests, however, Parliament will likely need to appropriate more resources for its own institutional capacity and consider revising the Budget process as has been enacted - if for no other reason than to grant itself more time and space to consider these incredibly significant Bills.
To Muller’s list of challenges that Parliament will need to address, I would add that the legislature must urgently consider amendments to the Money Bills and Related Matters Act.
This Act sets out the procedure for passing money Bills that impose taxes and appropriate public money. Some have incorrectly argued that until this statute was enacted, Parliament was not in a position to amend fiscal statutes, but this is not true as the power emanates from the Constitution, and the Money Bills Act simply sets out the process as envisaged by Section 77(3) in the Constitution.
The Money Bills Act does, however, contain a number of problematic provisions, and chief among these are those provisions that purport to subject the legislative process of passing Acts through Parliament to the so-called fiscal framework.
The fiscal framework is, in essence, a collection of estimates and assumptions produced by Treasury which should serve to inform Parliament when it considers potential amendments to a fiscal statute (ie to amend the Budget).
Unfortunately, the Money Bills Act, on a simple reading, states that Parliament is not only bound to first adopt Treasury’s estimates before considering the proposed new fiscal statutes, but is further bound to ensure that any further amendments to the relevant money Bills remain consistent with the fiscal framework.
During the 2023 public participation period, I raised this issue, but it has not been meaningfully addressed and remains fertile terrain for a potential procedural challenge to the constitutionality of the Budget process.
Leaving aside the spending Bills, there are also serious issues likely to arise from the continued use of a little-spoken-of power, namely the minister of finance’s power to impose and increase taxes by mere announcement.
3. The power to impose taxes by mere decree
The publicly declared reason for delaying the Budget Speech was the planned increase of the value-added tax (VAT) rate from 15% to 17%. In the end, the VAT hike was reduced from the proposed 2 percentage points to a 0.5 percentage point and has been staggered over a two-year period.
Here it is important to note that in terms of Section 7(4) of the Value-Added Tax Act (VAT Act), the minister of finance is ostensibly empowered to change the VAT rate by mere announcement, subject to this change being ratified by Parliament within 12 months. The provision is worded as follows:
“If the Minister makes an announcement in the national annual Budget contemplated in section 27 (1) of the Public Finance Management, 1999 (Act No. 1 of 1999), that the VAT rate specified in this section is to be altered, that alteration will be effective from a date determined by the Minister in that announcement, and continues to apply for a period of 12 months from that date subject to Parliament passing legislation giving effect to that announcement within that period of 12 months.”
According to the Budget documents presented to Parliament, the minister of finance has, in terms of Section 7(4), declared that the VAT rate is not only increased from 15% to 15.5%, but the effective date of this change is 1 May 2025.
It is hard not to see the use of this power as extremely fertile terrain for a legal challenge, particularly because VAT, unlike income tax, is not based on an annual assessment and so it will immediately become a live issue in May.
As a result of Section 7(4) of the VAT Act, the language of which is replicated in other tax Acts, the minister is ostensibly able to circumvent the legislative process and very problematically make law by mere announcement. Apart from likely breaching the separation of powers, there are also obvious practical issues that arise from the use of this provision.
What happens if Parliament fails to ratify the change within the prescribed 12 months? What happens if Parliament, in exercising its legislative authority, eventually enacts something different?
What happens to all of the money collected by virtue of what in the end is an unlawful and illegitimate tax?
These questions might have seemed purely academic when a single party had an absolute majority in Parliament (and when I wrote my thesis on this topic), but in a hung Parliament these are very real concerns.
In addition to concern regarding the need to uphold Parliament’s critical democratic mandate to decide how we are taxed, there is also an immediate practical concern for the poor SARS officials who are caught in a catch-22 scenario.
The law, as it stands, requires that the higher rate of tax be collected, but the legal basis for this could evaporate retrospectively, essentially making it an illegitimately and illegally collected tax. It is also not immediately clear that the existing administrative provisions designed for guaranteed refunds - which are guaranteed by a direct charge against the Revenue Account - will in fact apply.
This is a provision that is clearly ripe for legal challenge and should, in my view, be struck down. Determining the rate of national taxes is clearly a legislative competence and, in light of the un-appealed Pienaar Brothers judgment, Parliament can enact with retrospective effects changes in the tax rate without the use of this prospective lawmaking power.
There is, unfortunately, precedent set by the Constitutional Court in the recent judgment of Nu Africa, which permitted a unilateral amendment to a schedule attaching to a tax Act. While this judgment muddied the waters considerably, and should respectfully be critiqued, I am nevertheless confident that it can be distinguished from the power reflected in section 7(4) of the VAT Act.
Unlike the case in Nu Africa, here the minister of finance is literally given the power to make law in a speech - surely even a monarch would blush at such an extravagant power.
So, what happens next?
One needs to separate out the spending and taxing statutes because there are different timelines and different pressure points for each. The spending statutes are generally required to be enacted within a few months.
The reason for this is that in the “event of a gap occurring between the end of the prior financial year and the commencement of the appropriation Act for the new financial year… [organs of state are permitted to make] further spending [which] is limited to 45 per cent of the previous year’s appropriation as well as subjected to other prescribed constraints”.
If, as I hope is the case, Parliament intends to meaningfully facilitate public participation and amend spending bills in order to close the gap in relation to the state’s wider obligations, then it may be necessary for Parliament to pass further interim enactments.
These might include extending the interim payments guaranteed by a direct charge and possibly revising the Money Bills Act. Very specifically, the fiscal framework is likely to be fertile terrain for challenge by any party seeking to open up and democratise the Budget process.
With regard to the tax bills, and in particular the VAT increase, there is almost certainly going to be scope for challenging the minister of finance’s ostensible power to impose taxes by mere decree. Provisions such as section 7(4) of the VAT Act, which circumvent Parliament’s legislative authority, are extremely fertile terrain for such a challenge.
Given the recent events and the new paradigm of a hung Parliament, there appears to be a modest, but notable, opportunity to correct the longstanding democratic deficit present in the Budget process. Whatever the eventual outcome of the 2025 Budget process, it must surely now be recognised as Parliament’s decision to make.
The road to democratising the Budget process is hopefully now truly underway. DM