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The main budget deficit trajectory remains more or less intact compared to the March forecast to 4.5% (4.7%), 4.6% (4.4%), 3.7%, and 3.3% of GDP from FY24/25 to FY27/28.
Key focus points
Going into the Budget, we were on the lookout for the impact of a lower GDP growth forecast on tax receipts, the GNU’s spending priorities, whether the budget is growth supportive, and the amount of tax increases necessary to contain the impact of higher spending on the budget deficit. Our working assumption was the GNU and National Treasury’s commitment to fiscal consolidation.
Our takeaway is that the GNU and National Treasury are toeing the line. The commitment to implement structural reforms is in place, reflected in the composition of spending that sees infrastructure spending grow by nearly 11% p.a. to support higher growth.
The fiscal risk premium currently embedded in the 10-year South African Government Bond (SAGB) yield is in line with our fair value of 10.5%. In the absence of meaningful growth acceleration, several technical and administrative issues will increase in importance. These pertain to a spending review and SARS’s ability to increase tax collections. Failing this, the tax burden on individuals will continue to be used to ensure fiscal consolidation.
Government ticks the boxes for commitment to fiscal consolidation
There are three measures to rate the National Treasury’s performance in achieving fiscal consolidation. These are (1) the primary budget surplus, (2) the peak in the debt-to-GDP ratio, and (3) the composition of spending.
The context is sluggish economic growth, a steep yield curve that reflects the fiscal risk premium, and the challenge to stabilising public finances. The fiscal position remains challenging with an elevated bond maturity profile in the next seven years, and ongoing spending and revenue pressures, while waiting for structural reforms to accelerate growth momentum.
-National Treasury has stuck to its fiscal consolidation path, focusing on a peak in the debt-to-GDP ratio in FY25/26, for which the time has arrived. Its forecast is for the ratio to peak at 77.6% of GDP this year, higher than the previous projection of 76.2%. But this is mostly a function of lower nominal GDP growth, which has shaved R130b from the denominator. Whether this will be a true turning point or a sideways consolidation will depend on growth, SARS’ ability to collect more taxes, and the implementation of spending reviews.
-A primary budget surplus - the de facto fiscal anchor - has been achieved in FY24/25 of 0.5% of GDP and is projected to rise to 2.1% of GDP by FY27/28. However, debt-service costs are expected to stabilise at 5.4% of GDP over the Medium Term Expenditure Framework (MTEF) period, growing by 7.4% p.a., which is faster than non-interest allocations of 7.4%. The high real cost of financing, which embeds the fiscal risk premium, relative to lower nominal GDP growth, can only be addressed by an acceleration in growth, which, by implication, will lower the fiscal risk premium.
-The composition of spending has slowly turned from a persistent increase in current spending to more infrastructure spending.
October 2025 MTBPS watch list of announcements will be critical in enhancing fiscal credibility
There are many angles that can streamline both the budget process and government expenditure. Dealing with the efficiency of spending and accelerating reform implementation are both slowly unfolding.
Several of the initiatives are due to receive updates in the October 2025 Medium Term Budget Policy Statement (MTBPS), and these could contribute to more consolidation on the expenditure side, as well as countering potential tax increases that have been pencilled into the baseline MTEF period.
These include the following:
-Fiscal anchors reform.
-Early retirement initiative, although the allocation has been reduced from R11.0bn to R4.0bn, with the focus remaining on 15,000 workers.
-Spending reviews, of which R37.5bn in savings has been identified from poorly performing or inefficient programmes. Low priority or underperforming programmes will be closed, and greater efficiency in procurement, ICT, and infrastructure management needs to be achieved. Reforms are to be implemented from reviews undertaken of public employment programmes and active labour market programmes.
The 2024 MTBPS indicated that spending reviews would be conducted on the social grant system and the skills levy. It noted that extensive financial support is provided to unemployed individuals, distributed by various agencies that currently do not operate as a cohesive, integrated system. There is a lack of linkage between the social security system and the policy goal of increasing employment. Reforms to the grant system, combined with a consolidation of public employment initiatives, have been undertaken.
-Local authorities have been included in Operation Vulindlela’s second term. In conjunction, the government’s review of conditional grants should translate into a range of reforms to improve how infrastructure programmes and projects are planned, procured, contracted, and implemented. This will also be extended to provinces.
-Identifying ghost workers and other payroll irregularities.
More realistic macroeconomic forecasts are assumed in the baseline forecast
The challenging global growth backdrop – in the context of higher “Trumpian” tariffs, lower global trade, and the potential impact on confidence and investment – has seen National Treasury revising its growth and inflation forecasts to be more aligned with consensus and Investec Corporate & Institutional Banking's (ICIB) forecasts.
We note that the current forecast is like the downside risk scenario presented in March 2025. The GDP projections of 1.4% and 1.6% and inflation at 3.7% and 4.2% in 2025 and 2026, respectively, are reasonable. Treasury’s projection of fixed capital formation at 3.2% in 2025 is more upbeat than ICIB’s forecast of ~1.7%, even though it has been revised lower over the MTEF period. Household consumption is projected to rise by 1.8% (ICIB at 1.9%).
National Treasury notes that domestic risks are to the downside, with ongoing port and rail constraints and increased spending pressures. However, we think the nominal GDP growth forecast of 5.8% is too high compared to ICIB’s forecast of 5.1%, whereas 6.1% is reasonable.
The balancing act of new spending measures and a revenue challenge
May budget proposals: Following the March spending proposals of a net increase in non-interest spending of R141bn (of which R75bn would have been financed from the VAT increases) covering the MTEF period, the May budget tabled proposals of R67.4bn. This will be financed by bracket creep and new tax measures to be announced in FY25/26 (see discussion below).
Both infrastructure and frontline services received additional funding. The allocation to infrastructure spending was reduced to R33.7bn from R46.4bn, with the largest reduction to Prasa to R12.3bn from R19.2bn; the R4bn allocation to disaster management was scrapped and the turnaround revenue-generating services in metro support were cut to R6.4bn from R8.5bn. Frontline services were allocated R41.3bn (P:R70.7bn). The cancellation of the VAT increase meant that additional social income grant relief of R8.2bn was reduced to R1.6bn.
Transnet: The National Treasury has reiterated that Transnet will not receive an equity injection. It is in discussions with the Minister of Transnet about Transnet’s liquidity and solvency challenges. The guarantee of R47bn will be extended to cover the R10bn bond redemption in FY25/26 and allow for capex investment.
The BFI will provide R2.0bn for specific projects through the BFI. National Treasury noted that faster progress is needed on the recovery plan to improve operations and finances. Moody’s recently placed Transnet on credit watch, warning of liquidity challenges facing the entity.
Paying more tax vs SARS’s ability to collect more taxes
The impact of lower GDP growth forecasts has reduced the baseline revenue forecast by ~R27bn in FY25/26. To counter this, tax revenue will be raised by a total of R18.0bn, resulting in a net shortfall of R5.6bn. The measures consist of:
- No adjustment to personal income tax brackets (+R15.5bn),
- No inflationary adjustments to medical tax credits (+R1.3bn)
- An inflation-linked increase in the fuel levy of 15c/l
- Specific excise duties (+R1.3bn); and
- Scrapping the zero-rating of additional food items that would have cost the fiscus R2.2bn.
In addition to the carry-over effect of bracket creep over the MTEF period, National Treasury has pencilled in a further R20.0bn tax increase in FY26/27. The implementation thereof will be contingent on SARS’s ability to raise additional revenue through more efficient tax administration and higher tax compliance.
A further R3.5bn has been allocated to SARS, in addition to R4.0bn in the October 2025 MTBPS, to enhance its operational capacities. The objective is to raise additional revenue from debt collection by R20bn to R50bn per year. This has not been factored into revenue estimates and could potentially offset new tax increases in FY26/27.
Financing strategy: Bond supply unchanged, with a larger rundown in cash balances
The main budget deficit trajectory remains more or less intact compared to the March forecast to 4.5% (4.7%), 4.6% (4.4%), 3.7%, and 3.3% of GDP from FY24/25 to FY27/28.
- FY25/26: The main budget deficit increases to R361.3bn from R353.9bn, with the total financing requirement at R588.2bn.
- T-bill issuance: The net increase is projected at R38.4bn.
- Long-term bond issuance consisting of SAGBs, inflation-linked bonds (ILB), floating rate notes (FRNS) and Sukuk: Cash generated from issuance is estimated at R345.3bn (R343.2bn).
- Foreign bond issuance: $5.5bn and a total of $14.6bn over the medium term.
- Larger drawdown in cash balance: R106.9bn from R96.3bn.
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