The proposed VAT increases of 0.5ppt, both in 2025 and 2026, have been scrapped. This would have raised R75bn in revenue over the MTEF period to finance higher spending. Scrapping the VAT increase necessitates a reduction in spending to maintain a neutral impact on the budget deficit. The focus now will be on where said spending will be lowered, and the ability of the so-called “GNU” to craft a way forward that both demonstrates its priorities and allows for consensus.
- Global growth and South Africa’s macroeconomic forecasts have been revised lower.
- The GNU is committed to stabilising the debt-to-GDP ratio.
- A VAT increase is not available to finance an increase in new spending.
- Operation Vulindlela Phase 2’s agenda has been announced, and Budget 3.0 will allocate more funding.
- There is additional cash from a higher closing balance and possibly the GFECRA valuation (depending on a formulaic allocation which has to be agreed to).
Key focus points
Budget 3.0 will continue where its two predecessors faltered, with added pressure to be more growth-focused as GDP projections are again marked down. The SAGB yield curve has steepened again in April following a repricing in the country risk premium in H2 24, in anticipation of faster enactment of structural reforms in the wake of the GNU formation. The May 2025 budget will be solving for balancing new expenditure measures with lower tax revenues. The commitment to fiscal consolidation is likely to remain, with the debt-to-GDP ratio sitting uncomfortably at 76% of GDP. However, some fiscal slippage is expected, but this may not translate into an increase in bond supply due to higher available cash balances.
These pertain to a revision of National Treasury’s growth and inflation forecasts, which in turn affects the baseline gross tax projection. Tax measures – such as the bracket creep that Budget 2.0 resorted to in order to finance new expenditure – are currently required to fill a potential shortfall in the baseline October 2024 MTBPS forecast, which exposes the main budget deficit to the political decision on how much and what types of new spending South Africa can afford. The clock is ticking: Moreover, three bills in the fiscal framework need to be passed. The Appropriations Bill needs to be finalised within four months of the start of the new financial year in April 2025. There is currently a spending cap of 45% based on the FY24/25 budget. Funds withdrawn from the Revenue Fund may be utilised only for services for which funds were appropriated in the previous annual budget or the adjustments budget. Thereafter, it may not exceed 10% of the total amount appropriated in the previous budget.
Starting point: FY24/25 ends with a higher closing cash balance
Better FY24/25 outcome: The outcome for FY24/25 revenue and expenditure numbers will be included in Budget 3.0, showing a higher closing cash balance of R15.0bn. Gross revenue receipts were R9.0bn better than the February 2024 forecast and R15.0bn ahead of the October 2024 MTBPS forecast. The contributory factors were a meaningful improvement in corporate income tax (CIT) collections (+R16bn) and a larger withdrawal from the two-pot retirement fund pension fund balance of R45bn, which raised R13bn (F: R4 bn) although PIT missed the target by R9.0bn. SARS’s effort to improve efficiencies and compliance also played a role in closing the forecast gap, and this effort is expected to become more prominent over the MTEF period. On the expenditure side, the target was missed by R6.0bn. The implication is a higher closing cash balance of R15.0bn.
Main budget deficit outcome: The main budget deficit consequently beat estimates (of 4.7% of GDP) at 4.5% of GDP, as it declined from an estimated R356.1bn to R336.7bn.
New macroeconomic forecasts in a changing global landscape
The global landscape is changing and South Africa’s structural reform programme’s manifestation in higher fixed investment is materialising only very incrementally. In April 2025, the IMF revised its global growth forecasts to 2.8% and 3.0% for 2025 and 2026, respectively, down from 3.3% predicted for both years. The Trump administration’s policy agenda of raising trade barriers has already caused upheaval in global financial markets, with a toned-down tariff versions to be followed as bilateral trade and investment deals are negotiated. While a trade war between the US and China appears to have been avoided – a risk scenario that the markets moved to price in in early April – US trade tariffs will be higher, and this will have an impact on global trade and economic growth in many countries in Europe and China, South Africa’s major trading partners. For example, the weighted average tariff on US imports from China may have been reduced from more than 100% to 43% for the next 90 days, way above the 9% tariff increase in 2018/19. In South Africa, ICIB and Bloomberg consensus forecasts for economic growth have been lowered to 1.4%, from 1.9% and 1.7% in late 2024.
National Treasury’s GDP forecast will update the 2024 outcome of 0.6% from its projection of 0.8%, with 1.9% in 2025 to be more aligned with market consensus. Inflation has consistently surprised on the downside in the past six months, leading to a revision in the market and the SARB’s inflation forecast. National Treasury’s 2025 forecast of 4.4% (0.8ppt higher than the consensus of 3.7%) will also be lowered. In 2026, the market consensus is at 4.5%, with National Treasury at 4.6%. The combination of lower growth and inflation implies slower nominal GDP growth. National Treasury’s 7.0% and 6.4% are too high compared to ICIB’s projection of 5.1% and 6.0%.
And the dilemma of lower tax revenues in the baseline forecast
Lower baseline revenue forecast: The revision to the macroeconomic forecast lowers the gross tax revenue forecasts. Our analysis shows that when the October 2024 MTBPS revenue forecast for FY25/26 is used as the baseline forecast, tax revenues could be ~R35bn less, when assuming a gross revenue-to-GDP ratio of 24.7% of GDP. We think there are two ways of returning the forecast to the October 2024 baseline. These consist of bracket creep of R18.0bn, announced in Budget 2.0, with carry over effects of R19.1bn and R20.3bn in the outer years over the MTEF, and increased reliance on SARS. In Budget 3.0, the Minister of Finance announced an allocation of R8.5bn (up from R3.5bn) to SARS over the MTEF period. SARS’s improvement in processes and efficiencies has added to tax revenues over the past five years. In FY24/25, compliance revenue has yielded an additional R301.5bn. In addition to an increase in customs duties and bracket creep for medical aid contributions, our analysis suggests that there is no additional tax revenue to finance new spending measures, unless SARS can collect more revenues.
The spending challenge
The removal of a 0.5 ppt increase in VAT in FY25/26 and 26/27 (which would have raised ~R80.0bn) to finance new spending on frontline services means a R75.0bn spend shortfall which will have to be reprioritised or reduced. The carry-over total from bracket creep raises ~R58bn over the MTEF period. The focus point is how spending on frontline services and infrastructure can be balanced, in addition to an above-inflation increase of 5.5% in public sector wages of R23.4bn, other spending of R37.7bn, and infrastructure of R46.7bn.
The growth agenda is manifested in Operation Vulindlela 2 objectives, which have been extended to include the digitalisation of the public sector, addressing spatial inequalities and reforms at local authorities, representing the growth drivers. Some of these initiatives are set to receive financing in Budget 3.0. In Budget 2.0, an amount of R46.7bn was provisionally provided to finance new growth initiatives. This consisted of the Budget Facilities for Infrastructure of R11.8bn, disaster management of R4.0bn, Prasa R19.2bn, turnaround revenue-generating services in municipalities of R8.5bn, and the Western Cape Rapid School Build Programme of R2.3bn.
ICIB’s assumption: We think that the Minister of Finance could announce a spending review in the October 2025 MTBPS. We have pencilled in a net increase in spending of R30.0bn compared to R61.6bn in Budget 2.0 in FY25/26, consisting of a combination of infrastructure and “other”. In contrast, new spending on the frontline could be tied to a spending review or repriorisation of existing expenditures.
Fiscal position and financing: An out-of-jail card for now
We expect some fiscal slippage and see the main budget deficit rising from Budget 2.0’s projection of R353.9bn to R377.0bn, or 4.5% of GDP (P: 4.4% of GDP and the MTBPS 2024 of 4.3% of GDP). The higher budget deficit may not necessarily translate into an increase in bond issuance. There have been two developments since Budget 2.0:
- The opening cash balance is R20bn higher; and
- The GFECRA value has increased by nearly R80bn due to a rise in the gold price. While the volatility in the gold price may require SARB’s contingency reserve buffer to be raised, there could be an additional amount available for distribution on top of the R25.0bn that is included in the baseline forecast but this is not confirmed.
As such, revisions to National Treasury’s current borrowing strategy are not anticipated.
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