Budget 2025 | High stakes for SA

Following a weekend of high drama and reports of a breakdown in negotiations between the ANC and the DA, News24 published an article on Monday 31 March 2025 that the likelihood of reaching a deal to pass the fiscal framework presented by the Minister of Finance on March 12th at Tuesday’s Standing Committee on Finance is significantly increased. This March 2025 framework appears to be the base case assumption and includes a proposed VAT increase of 0.5 ppt alongside higher spending. However, there remains the possibility that revenue and spending proposals could be amended before final approval. Should the framework be agreed upon, it will proceed to Parliament for approval. 

Budget dynamics

The budget standoff among the government of national unity (GNU) partners extends beyond the initial disagreement regarding the proposed 2-ppt increase in VAT, later revised to 0.5 ppt, aimed at financing increased expenditure. The core issue lies in the urgent need for a more robust economic policy capable of addressing an economy trapped in low growth and struggling to generate jobs. 

National Treasury is grappling with the challenge of stabilising the debt trajectory, currently at 76% of GDP, as outcomes consistently exceed the Medium-Term Expenditure Framework (MTEF) rolling three-year projections. The cost of funding, reflected in nominal bond yields, is surpassing the growth rate, complicating efforts to stabilise the interest payment ratio, which stands at 22% of gross revenues.

The steep yield curve is indicative of the fiscal risk premium associated with weak economic growth, which is further exacerbated by tax increases, including value-added tax (VAT) and bracket creep, to support higher expenditure. While there is a pressing need for increased frontline spending in critical areas such as health, policing, and education, current expenditure is marred by significant waste, inefficiencies, corruption, and contractual irregularities. National Treasury continues to issue warnings regarding risks to the fiscal outlook, particularly as State-Owned Entreprises (SOEs) may require additional bailouts.

This precarious situation necessitates a comprehensive and coherent economic strategy to foster sustainable growth and improve fiscal stability. Former Director General at the National Treasury Michael Sachs calls this a chronic fiscal rather than an acute fiscal crisis. The fiscal situation is chronic in the sense that it hurts and slows down growth, but it is not debilitating. However, we are not likely to fall off a fiscal cliff in the medium term. However given the pain it causes to the economy; it is still essential to fix.

The current budget lacks a growth-positive framework despite some increases in infrastructure spending, such as allocations for Passenger Rail Agency of South Africa (PRASA). South Africa urgently needs a coherent growth plan. Addressing inefficiencies in network industries is crucial for enhancing overall economic performance.

However, the government faces a significant bond redemption profile extending to 2030. While it is managing this through switch auctions and prefunding—particularly in FY24/25 to bolster closing cash balances—there are concerns regarding the execution of these switch auctions. The uncertainty surrounding the borrowing requirement projections, especially in light of lower GDP growth forecasts for 2025, adds to the complexity of the fiscal landscape. Currently, all spending allocations remain provisional and may or may not be realised.