Budget speech too optimistic about the economy?

Although Treasury’s macroeconomic projections in the budget speech are virtually unchanged from a month ago, its 2024 GDP estimate of 0.8% has since become outdated after GDP for the fourth quarter came in lower than expected. Was the finance minister too optimistic?

Jee-A van der Linde, senior economist at Oxford Economics Africa, says considering the deteriorating economic outlook for the global as well as the domestic economy, they believe official economic growth forecasts, especially the 1.9% pencilled in for 2025, are too optimistic.

“The budget review does not adequately address the risks that US trade tariffs pose to global economic growth. In light of the latest tax proposals, clustering headwinds to economic growth present downside risks to Treasury’s revenue assumptions.”

He also points out that Treasury’s fiscal estimates and projections deteriorated since the 2024 medium term budget policy statement (MTBPS) and are worse compared to last year’s budget.

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Budget speech: Positive focus on infrastructure and economic growth

Frank Blackmore, lead economist at KPMG South Africa, says on the positive side, a lot of focus of the budget speech was towards infrastructure and economic growth.

“Depending on how that infrastructure spend is managed, how efficiently those projects are undertaken, that could result in further growth in the economy, expansion in the economy and that would obviously be good for employment as well as for participation in the economy.

“Therefore, from that perspective, I see some benefits. On the public service side, health, education and grants all increased while infrastructure spend also increased, although if I take the sum of those four items, education, health and grants, which is your pro-poor component and I add the infrastructure to it, the total of that is still less than what is going to the public sector wages, plus debt service cost at this point in time.”

He says he found two other aspects of the budget speech interesting. The savings out of the Eskom Debt Relief Programme, where only R40 billion will be needed this year instead of R70 billion and R10 billion in two years’ time, which will result in savings of R20 billion is good news, he says.

“I also think the emphasis on public services is very important, as well as increasing the allocations made to the peace and security sector, including justice and Statistics SA. If you want to run an economy based on data driven, factual aspects, it is important to give Statistics SA greater funding. as well as Sars to be able to pursue illicit markets and tax evaders to pull them into the safety net.”

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Balancing fiscal consolidation with growth and social support

Dr Elna Moolman, group head of South Africa macroeconomic research at the Standard Bank Group, says the budget speech had to balance fiscal consolidation with growth and social support. “The single most important feature of this budget is government’s unwavering commitment to fiscal consolidation, with the debt to GDP ratio peaking imminently (in FY25/26).

“The two other key tenets that we expected to prevail, increasing both pro-poor and pro-growth fiscal spending alongside ‘tough love’ for SOEs were indeed also preserved.”

She says the budget, if adopted, is positive for financial markets if it gets enough support from the government of national unity (GNU).

“Budget 2025 is a reasonable compromise between the interests and preferences of the major GNU partners and we interpret the minister’s indication that this was the ‘product of the combined and careful consideration of the Cabinet of the GNU’ as indication of support from the GNU partners.”

Sanisha Packirisamy, chief economist at Momentum, also highlights two key aspects of the budget. “Firstly, government is implementing a moderated VAT increase to address a significant revenue shortfall, although it will still affect households. This move reflects the delicate balance between fiscal responsibility and managing inflation and inequality.

“Secondly, there is a strong focus on boosting infrastructure, especially in energy, water and transport, as part of broader reforms aimed at attracting private investment and stabilizing state-owned enterprises like Transnet and Eskom. Structural reforms in these sectors are critical for long-term economic growth.”

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How did budget balance priorities of GNU?

Angelika Goliger, chief economist at Ernst & Young, says the updated budget tried to balance the need to address the country’s fiscal challenges while aiming to stimulate economic growth and improve public services. Over and above these priorities, it also had to balance political pressure from the GNU. 

“National Treasury anticipates real GDP growth in line with market expectations over the medium term, driven by an improved energy outlook, moderating inflationary pressures and an easing interest rate environment.

“However, this optimistic outlook is tempered by potential downside risks, including global trade disruptions and geopolitical events that could affect South Africa’s small open economy.” 

She also points out that inflation is expected to settle at lower levels compared to previous forecasts, thanks to more moderate tax increases. The debt-to-GDP ratio is anticipated to stabilise at a higher level than previously predicted, peaking at 76.2% in 2025/26 and tapering off to around 70% by the start of the next decade. 

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How will future increase in expenditure be financed?

“Budget 2025 also emphasises the need for future expenditure increases to be financed through a combination of deprioritising underperforming programs and implementing additional tax measures. This includes a proposed tax on foreign retirement fund payouts and safeguarding the country’s debt profile.”

Along with the budget speech document, Treasury released a discussion document on fiscal anchors and Goliger points out that South Africa’s fiscal landscape has been marked by persistent imbalances between tax revenue and government spending, leading to a significant increase in debt from 24% of GDP in 2009 to 74% in 2024.

“This resulted in increased debt service costs, which now consume 21% of tax revenue, reducing fiscal space for essential public services. To address these challenges, Treasury is considering the implementation of a formal fiscal anchor.

“This could take the form of a numerical fiscal rule, such as a debt ceiling or deficit limit, or a principle-based framework integrated into parliamentary processes. The goal is to enhance fiscal discipline, transparency, and sustainability, ensuring that future administrations are not burdened by unsustainable fiscal commitments.”