Budget Preview: Take Two

Key focus areas when Finance Minister Enoch Godongwana delivers his 2025 Budget Speech will include:

• The increase in net new spending and its composition.
• Proposed tax increases to fund this new spending.
• Implications for economic growth.

This framework will be critical for assessing the potential impact on fiscal policy and overall economic performance.

The February 2025 Budget was rejected due to a proposed 2 percentage point increase in VAT aimed at financing an increase in non-interest spending. This proposal was unexpected, as the October 2025 MTBPS did not indicate any such intention. National Treasury estimates that a 2 ppt VAT increase could generate R60.0bn, R63.7 bn and R67.3 bn over the next three years, totaling R191bn. This revenue is intended to finance a net increase in new spending of R173 bn during the same period.

Given South Africa's elevated debt levels, currently at 76% of GDP, and debt servicing costs consuming 21.1% of gross tax revenues, it is evident that the National Treasury is focused on stabilising debt by maintaining a primary budget surplus throughout the Medium-Term Expenditure Framework (MTEF). An increase in spending without a corresponding rise in revenues would jeopardise the estimated primary budget surplus of 0.5% of GDP (approximately R34bn) for the fiscal year 2024/25.

The anticipated multiplier effect of the proposed budget is low, suggesting that the economic benefits of the increased spending may not be sufficient to stimulate significant growth. This raises concerns about the effectiveness of the budget measures in fostering a robust economic environment and the need for more tax increases in coming years if the proposed spending trajectory is extended.

The redistributive impact of the proposed VAT increase, alongside the zero-rating of additional foodstuffs and adjustments to tax brackets for lower-income earners, is expected to negatively affect middle- and high-income taxpayers, who are already subject to high tax burdens.

National Treasury's 2025 GDP growth forecast has been revised to only 0.2 ppt higher at 1.9% (compared to the previous forecast in October 2025), with consumption spending projected to grow from 1.8% to 1.9%. However, the downward revision of GDP growth by 0.6% for 2025, from an earlier estimate of 0.7% in 2026, has led us to adjust our own 2025 forecast downwards to 1.6%, with associated downside risks.

The proposed increase in current spending is primarily focused on the following areas:

1. Enhancing Compensation and Hiring: A significant portion (21.6%) is allocated to improving compensation and hiring additional personnel in front-line departments.
2. Other Spending Initiatives: Another 21.6% is directed towards various spending initiatives, including employment programmes, the South African National Roads Agency Limited (SANRAL), debt repayment, SANDF troop deployment in the Democratic Republic of the Congo (DRC), local government elections, and direct charges.
3. Infrastructure Investment: The remaining 26.9% is earmarked for infrastructure investment, which includes R19.2bn allocated to the Passenger Rail Agency of South Africa (Prasa) and R11.8bn for the Budget Facility for Infrastructure Window 8 projects.

Addressing the fiscal challenge is fundamentally a political decision, and recent media reports indicate that the GNU has yet to reach an agreement on the fiscal framework. Additionally, reports from the weekend highlighted that the Minister of Finance has linked the proposed 2 ppt VAT increase to the financing of a permanent social grant.

This social grant has been implemented annually since its introduction during the COVID-19 pandemic in 2020, and an unallocated reserve has been set aside each year within the Medium Term Expenditure Framework (MTEF) period to support this initiative. The ongoing discussions and decisions surrounding the fiscal framework will be crucial in determining the sustainability and effectiveness of such social support measures.

Spending review

A constructive development would be the announcement of a spending review, which could take approximately three to six months to complete. Over the past decade, National Treasury has managed core non-interest spending to counter R520bn in bailouts to state-owned enterprises (SOEs). This has resulted in a stabilisation or decline in real spending per person since 2016, highlighting the need to increase funding for front-line services. However, it is critical to professionalise and enhance the efficiency of government spending. 

The October 2024 MTBPS indicated that spending reviews would be conducted on the social grant system and skills levy, with results expected to be presented in the 2025 Budget; however, this has not yet occurred. The MTBPS noted the extensive financial support provided to unemployed individuals, which is disbursed by various agencies that do not operate as a cohesive, integrated system. There is currently no linkage between the social security system and the policy goal of increasing employment. The government is exploring reforms to the grant system and aims to consolidate public employment initiatives. This will include a review of the skills development funding system, which is allocated R22.7bn for the fiscal year 2024/25.

In April 2019, President Ramaphosa received a report from the Department of Public Service and Administration regarding the reconfiguration and rationalisation of administrative processes, which remains relevant in the context of these ongoing discussions.

Measures to raise additional revenues

In the short term, several scenarios for tax increases are proposed based on the net increase in spending. Given that a 2 ppt VAT increase is unlikely to be enacted, a combination of tax increases appears more probable:

Spending Increase of R25bn

• VAT remains unchanged at 15%
• Bracket creep: R16bn
• Fuel levy: R4bn
• Medical aid tax credit: R2bn
• Customs duties: R3bn

Spending Increase of R30bn

• 0.5 ppt increase in VAT: R15bn
• Bracket creep: R16bn
• Zero rating of food products and bracket relief for two lower income groups

Spending Increase of R40bn

• 0.75 pp increase in VAT: R22bn 
• Bracket creep: R16bn 
• Potential fuel levy increase: R4bn 
• Zero rating of food products and bracket relief for two lower income groups

Pension Contribution Holiday

• A government contribution holiday for the GEPF amounting to R53bn, which could be combined with a spending review.

Corporate Income Tax and Wealth Tax

• An increase in corporate income tax and wealth tax is considered highly unlikely.

Additionally, SARS Commissioner Kieswetter has indicated that enhancing tax capacity could lead to increased tax collections. The International Monetary Fund (IMF) has suggested that comprehensive tax administration reforms could raise revenue by 3 percentage points of GDP over six years. Moreover, the digitisation of revenue administrations could boost tax collection by nearly 1 ppt of GDP. However, these measures are viewed as medium-term objectives rather than immediate solutions.