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There is still a lot of uncertainty around Budget 2025, which Finance Minister Enoch Godongwana will deliver on Wednesday. It was postponed because the other parties in the Government of National Unity (GNU) did not agree with the proposal to hike the Value Added Tax (VAT) by 2%.
Where will the minister find the R58 billion he needs to balance the country’s books? Will he really cut the SRD grant as rumoured, or will he make consumers pay for the shortfall in other ways while increasing VAT by 0.25%?
However, Mpho Molopyane, chief economist at Alexforbes, says while the focus has been on the 2% VAT rate increase to 17%, the bigger issue is that the fiscal outlook was little changed despite the substantial tax increase.
“Instead, the debt-to-GDP ratio was projected to stabilise at 76.1%, slightly higher than the 75.5% projected in the 2024 Medium Term Budget Policy Statement (MTBPS). The additional revenue to be raised from the VAT increase would go towards funding above-inflation increases in social grants, infrastructure spending, the public wage bill and frontline services.
“Over the 2025/26 to 2027/28 financial years, the main budget revenue was projected to be higher by R182 billion and expenditure by R145 billion compared to the 2024 MTBPS. This would have resulted in a slight improvement in the main budget deficit, which was now projected to narrow to 3.2% of GDP in the 2027/28 financial, versus the 3.4% MTBPS estimate.”
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However, she points out that substantial risks to this outlook remain, as recently emerged spending pressures, such as the High Court judgment on the Social Relief of Distress (SRD) grant ruling that both the number of recipients and the grant amount must be increased, were not adequately addressed.
Molopyane says this suggests that National Treasury would have to find over R100 billion in additional revenue per year to fund this. “While indications are that Treasury will appeal the judgement, over the medium- to long-term social spending pressures remain given South Africa’s high unemployment rate.
“There are also concerns that higher education funding for the poor and the missing middle remains inadequate, with more funding also likely to be required for the National Health Insurance (NHI). Additional funds will also be required should United States Agency for International Development (USAID) funding for President’s Emergency Plan for AIDS Relief (PEPFAR) be permanently suspended.”
Molopyane also says it remains unclear what the revenue and expenditure mix of the revised budget will look like. “However, we expect the overall focus to remain on fiscal consolidation because Treasury consistently highlighted that elevated debt levels lead to higher debt service costs that crowd out social and infrastructure spending over the past few years.
“It is unclear how they will walk back some of the proposed spending, such as higher wages and additional funding for front-line departments aimed at building a capable state or how they will raise additional revenue as a VAT increase seems unpalatable. This puts the Treasury in a realm of difficult choices.”
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Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, say what is certain is that the budget must carefully navigate economic risks, including fiscal weakness, external volatility and pressing social needs.
“Striking this balance requires prioritising pro-growth infrastructure investment, maintaining fiscal discipline to prevent excessive debt accumulation, and ensuring targeted social support without overburdening public finances.”
They point out that the weaker-than-expected GDP growth outcome for 2024 (0.6%) may prompt Treasury to adjust its growth projections to reflect a lower starting point. In the initial budget proposal, Treasury projected GDP growth of 0.8% for 2024, rising to 1.9% in 2025 and averaging 1.8%
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Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, say reports suggest that VAT will be increased to between 15.5% and 16% after parties in the GNU agreed on a lower increase.
They also expect Treasury to increase the fuel levy after it was left unchanged in the initial Budget to compensate for the foregone revenue due to the lower VAT increase, but that other revenue adjustments likely will be limited.
“Therefore, Treasury will not realise the estimated revenue gains of R60.5 billion annually over the next three years. On the expenditure side, the government will be under pressure to limit aggregate spending growth.
“In the original budget, spending was planned to increase by 5.8% per year between 2025/26 and 2027/28. The public sector wage bill will have to be contained through staff attrition after government reached a three-year wage agreement with public unions.
“Lower increases in social grants will likely be pencilled in after the original budget increased the social protection bill at 5.8% a year between FY2025/26 and FY2027/28. However, we believe that Treasury will have to make provision for the SRD grants in FY2026/27 and 2027/28, as the current budget set aside R35.3 billion for FY2025/26 and only R443 million and R463 million for the next two years.”
Therefore, they say, the budget deficit target of 3.4% of GDP by FY2027/28 will be missed, and a wider budget shortfall over the next three years will push borrowing higher and raise debt service costs.
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Johann Els, group chief economist at Old Mutual, points out that the South African economy is in a better position this year than in the previous few years. Inflation is down significantly, interest rates are down, confidence has picked up, and we saw positive employment growth over the past three years.
“Therefore, I think the impact of a 2% increase in VAT will not be that negative in terms of the impact on consumer spending. Back in 2018, when VAT was increased from 14% to 15%, the pass-through was only around 30%.
“Some of the smaller retailers and the larger retailers probably did not pass through the increase to consumers to protect the volumes. I think the same will also happen now. I also do not think inflation will be affected much.”
He expects that there will be some other tax increases, like last year when income tax brackets were not adjusted for inflation, which effectively increased personal income tax revenue by R18 billion. “That is an option for this year.
“They will also have to increase petrol levies, maybe even significantly. It is better to increase indirect taxes than direct taxes.”
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Els does not think government has a lot of spending it can actually cut. “It is not as much as we think that can be cut. Over the past eight to ten years, they actually managed to keep the spending relatively under control.
“There is a demand for higher spending on university fees and the public wage increase that was bigger than it should have been. It is not that easy to cut it in the February budget, where there were numbers proposed for extra spending on nurses and teachers.”
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