What Budget 2025, although not delivered, shows – economist

The Budget 2025 speech was not delivered, and therefore it is not valid anymore, and the government will now have to go back to the drawing board and find ways to make up the budget deficit in other ways that everyone in the government of national unity agrees on.

After letting the country wait for almost twenty minutes after the Budget 2025 speech was supposed to start, the speaker informed the gathering that the minister of finance, Enoch Godongwana, will not deliver the speech anymore and will now only do so on 12 March.

Jee-A van der Linde, senior economist at Oxford Economics Africa, says they expected Budget 2025 to show a somewhat weakened fiscal outlook compared to the National Treasury’s 2024 projections, but no one anticipated things would unfold the way they have.

“The deterioration in fiscal metrics communicated in the now-defunct budget is due to downward revisions to tax revenue and upward spending adjustments. As a result, several tax adjustments were made, including the contentious proposal to raise value-added tax (VAT) from 15% to 17%.

“In addition, debt-service costs were also revised slightly higher, and Treasury saw gross government debt peaking at a higher level of 76.1% of GDP in 2025/26. We maintain that debt levels will overshoot the government’s shifting target to breach the 80% of GDP echelon over the coming years.”

ALSO READ: Budget 2025: Was the decision to increase VAT by 2% such a bad idea?

Postponed Budget 2025 will cause heightened market volatility

He says it is a fluid situation and speculation can be expected between now and when the minister tries again to deliver Budget 2025 on 12 March. “This will only fuel fiscal and political uncertainty that could lead to heightened market volatility. We will update our forecasts for South Africa once official estimates are finalised.”

Treasury’s unofficial fiscal estimates and projections have deteriorated since the 2024 Medium-Term Budget Policy Statement (MTBPS) and are also worse compared to last year’s Budget, he says. “The main reasons are due to spending overruns, namely increased employee compensation, social support and higher debt-service costs.

“At the opposite end of the ledger, tax revenue collections for 2024/25 were revised lower. Still, the forecast for revenues was adjusted higher over the medium-term expenditure framework (MTEF) after several tax adjustments.”

While Treasury intends to raise R58 billion in additional revenue in 2025/26 through the proposed 2% increase in VAT, it was accompanied by several measures to provide relief to poor households, including additional VAT zero-rating of essential food items and no changes to the fuel levy, he says.

“Treasury detailed a full inflation adjustment of the bottom two personal income tax brackets, a partial adjustment of the remaining income tax brackets, above-inflation increases on alcohol and tobacco excise duties and diesel refund relief for primary sectors.”

ALSO READ: Budget speech: VAT increase decision not made by someone who knows hunger

Budget 2025 revenue shortfall of R19.3 billion

Van der Linde points out that government revenue for 2024/25 fell short of Treasury’s estimates, mainly due to lower VAT collections, reduced fuel levy receipts and softer personal income tax contributing to the R19.3 billion tax shortfall.

“Economic activity has remained slow over the past year, but Treasury envisions that a pick-up in economic growth will add R189.2 billion to government revenue over the MTEF, although most of this would have come from the VAT rate increase.

“By choosing to increase VAT, Treasury distributes the tax burden in a more efficient and broad-based manner. We believe Treasury’s economic growth expectations (real GDP growth of 1.9% in 2025 and 1.8% per year over the MTEF) are somewhat optimistic and that there is some degree of risk that revenue growth might undershoot targets. This risk would have been much higher were it not for the increase in the VAT rate.”

ALSO READ: Budget speech: Why Godongwana wanted a VAT increase of 2%

Budget 2025 shows high pressure on expenditure side

Pressures on the expenditure side also remains high, he says, with main budget non-interest spending up R6.9 billion in 2024/25 compared to the 2024 Budget projection. The spending overrun is attributed to the troop deployment in the Democratic Republic of Congo, the repayment of debt for the Gauteng Freeway Improvement Project and spending announced in the 2024 Budget, including a proposed increase in the Covid-19 social relief of distress (SRD) grant.

Van der Linde says the 2025 Budget details R252.6 billion in additional spending over the MTEF period, with the main outlays including R46.7 billion allocated for infrastructure investments, R35.2 billion to extend the SRD grant to March 2026, R23.4 billion for the 2025 public-service wage agreement and R23.3 billion to increase the value of social grants by more than inflation.

In addition to these and other extra spending, R11 billion is set aside for the early retirement of civil servants. However, Van der Linde says, the allocations for infrastructure investments on their own are insubstantial from a growth perspective, and increased private-sector funding will also be needed.

“Government spending remains highly redistributive, with the social wage accounting for 61% of total non-interest spending over the next three years.”

ALSO READ: MTBPS: Not a rosy fiscal picture with disappointing fiscal slippage

Budget deficit in Budget 2025 higher than in 2024

Van der Linde points out that although the 2024/25 budget deficit of R34.4 billion was wider than what Treasury expected during the 2024 Budget, debt redemptions were R73.8 billion lower than estimated a year ago due to Treasury exchanging shorter-dated for longer-dated bonds.

“Consequently, the gross borrowing requirement declined from a projected R457.7 billion to R418.3 billion for 2024/25. No new bailouts to state-owned entities were announced, which bodes well for the overall debt outlook.

“However, debt-service costs were revised higher due to the annual budget deficit, elevated interest rates and a weaker exchange rate compared to the 2024 MTBPS. Similar to Treasury’s debt forecasts, debt-service costs are constantly revised higher and are expected to crowd out R424.2 billion in spending during 2025/26.”

According to the Treasury that debt-service costs will stabilise at 21.7% of fiscal revenue in 2024/25 and decline thereafter, but Van der Linde says they think otherwise. Meanwhile, Treasury forecasts show that gross debt stock will increase from R5.68 trillion in 2024/25 to R6.79 trillion in 2027/28, stabilising at 76.1% of GDP in 2025/26.

“Government’s failure to arrest the rise in debt levels damages Treasury’s credibility. Treasury said that it developed a debt sustainability forecasting model to enhance its framework for analysing fiscal sustainability. The government still has not committed to a long-term fiscal anchor, with Treasury noting that a debt-stabilising primary surplus will anchor fiscal policy over the rest of the decade.”

ALSO READ: Budget 2024: trying to do more with less

How Budget 2025 2% VAT increase would have helped or not

Van der Linde says the proposed VAT rate increase would have been a difficult one for the government to concede after keeping it at 15% since the 1% increase in 2018, but it highlights the tough spot they are in.

“VAT affects the general populace, and the increase will not go down well with voters. In the undelivered budget speech, the finance minister was quick to point out that government prioritised the poor and vulnerable and that South Africa’s VAT rate was low compared to global standards.

“However, in other areas, South African consumers and businesses face some of the highest tax rates in the world while receiving poor service delivery, although paying comparatively expensive administered prices.”

Van der Linde warns that there is a risk that this tax increase might weigh on domestic demand, which is currently in a fragile recovery mode. “Our views of South Africa’s fiscal situation are unlikely to change between now and 12 March, and we continue to forecast debt to rise beyond 80% of GDP, driven by rapidly rising debt-service costs and wider budget deficits than Treasury forecasts.

“It is clear that spending pressures remain worryingly high, and everything hinges on economic growth accelerating in the near term.”