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Budget 2025 was postponed to 12 March due to objections from the other parties in the government of national unity to increasing VAT by 2%.
Finance minister Enoch Godongwana flanked by Reserve Bank governor Lesetja Kganyago (left) and Sars commissioner Edward Kieswetter. Pciture: GCIS
Finance Minister Enoch Godongwana at last had the opportunity to deliver his Budget 2025 speech on Wednesday in a game of give and take where he trimmed his original plan to increase the value-added tax (VAT) by 2% to 0.5%, not increasing the fuel levy again but leaving the personal income tax brackets and medical tax credits unchanged.
Godongwana also apologised for the postponement of Budget 2025. Cabinet has not approved Budget 2025 yet, and it must still be debated in parliament, where the VAT increase is expected to lead to heated debate.
The VAT increase of 0.5% on 1 May will be followed by another 0.5% increase on 1 April next year, bringing the VAT rate to 16%. Godongwana says Treasury thoroughly examined alternatives to increasing the VAT rate and weighed up the policy trade-offs involved, including increases in corporate and personal income tax.
“Increasing corporate or personal income tax rates would generate less revenue while potentially harming investment, job creation and economic growth. Corporate tax collections declined over the last few years, an indication of falling profits and a trading environment worsened by the logistics constraints and rising electricity costs.”
He said in addition, South Africa’s corporate income tax collections are already higher than most of its peer countries, while an increase in personal income tax would reduce taxpayers’ incentives to work and save.
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To make up for the lower VAT revenue, personal income tax brackets were not adjusted for inflation, while rebates and medical tax credits will also remain the same. These measures are expected to raise R28 billion in additional revenue in 2025/26 and R14.5 billion in 2026/27.
However, Godongwana said government is aware of the cost-of-living pressures households face, including high food and fuel prices and rising electricity and transport costs. Therefore, concrete steps to protect vulnerable households will include expanding the basket of VAT zero-rated food items to include canned vegetables, dairy liquid blends and organ meats from sheep, poultry and other animals.
In addition to not offering South Africans any tax breaks, those who smoke and drink will also pay more as excise duties on alcoholic drinks, pipe tobacco and cigars will increase by 6.8% on April, while excise duties on cigarettes and vaping products will increase by 4.8%.
Godongwana said broadening the tax base and improving the administrative efficiency of the South African Revenue Service (Sars) will allow Treasury to spread the tax burden more evenly and equitably over time and with this in mind, R3.5 billion is allocated to Sars in the current financial year and an additional R4 billion over the medium term.
R284.7 billion was allocated for social grants to increase the old age and disability grants by R130, the Child Support Grant by R30 and the foster care grant by R70, while R35.2 billion was also allocated to extend the Covid-19 Social Relief of Distress (SRD) for another year. Nearly 28 million beneficiaries will access social grants.
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Godongwana justified these measures by emphasising that taking on additional debt to meet the spending pressure on government was not feasible. “The amount is simply too large. The cost of borrowing would be unaffordable. Our sub-investment credit rating would also make this level of borrowing costlier and put us at risk of even further downgrades.”
He said as much as the debate has been dominated by the proposed VAT increase, the bigger debate must be about how to grow the economy. “A bigger, faster-growing economy and the larger fiscal resources that come with it would give us more fiscal room to meet more of our developmental goals.”
However, he pointed out, the truth is that the economy stagnated for over a decade, with gross domestic product (GDP) growth averaging less than 2%, far below the level required to meet South Africa’s expanding list of needs.
In 2024, the economy grew by only 0.6% and over the medium term, GDP growth is projected to average 1.8%, but Godongwana said it needs to grow much faster to reach government’s goals.
Although Treasury’s macroeconomic projections were virtually unchanged from a month ago, its 2024 GDP estimate of 0.8% has since become outdated after GDP for the fourth quarter came in lower than expected.
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When it came to expenditure, the main change from a month ago was a reduced increase in the budget for social grants, although it was still above inflation. The previous version of Budget 2025 made provision for R23.3 billion, but that has been cut to R8.2 billion.
The R46.7 billion allocated for critical infrastructure investments was unchanged, while the highest public-sector infrastructure expenditure will be R219.2 billion on energy, R156.3 billion for water and sanitation and R402 billion for transport and logistics.
Most of the money will be spent by state-owned entities (40%), other public entities (13%) and provincial (21%) and local government (20%), with national (4%) and public-private partnerships (2%) representing the smallest share of project spending.
In the previous version of Budget 2025, Treasury’s forecast was that the country’s gross borrowing requirement for 2025/26 was R14.6 billion lower than the 2024 Budget estimate. However, the updated numbers show that the 2025/26 gross borrowing requirement is expected to be R3 billion higher than last year’s projection, amounting to R582 billion due to a wider budget deficit in 2025/26, equal to 4.6% of GDP.
In addition, debt service costs over the medium-term expenditure framework period were revised upwards by R12.1 billion. South Africa’s gross debt stock is expected to increase from R5.69 trillion in 2024/25 to R6.81 trillion in 2027/28.
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Treasury forecasts gross loan debt to stabilise at 76.2% of GDP in 2025/26, instead of the 76.1% predicted in the previous version of Budget 2025.
According to Godongwana, debt-service costs will amount to R389.6 billion in the current financial year, which means that 22 cents of every rand government raise in revenue goes to service the country’s debt. He pointed out that this is more than what is spent on health, the police and basic education.
“We must reverse this trend and prevent the cost of debt from taking away resources that could otherwise be spent on our pressing social needs or to invest in growth. Therefore, our fiscal strategy stabilises debt service costs as a percentage of revenue in 2024/25 by maintaining a primary budget surplus.”
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