Budget 2025: VAT off the table

The Minister of Finance has announced that the VAT rate will remain unchanged at 15% rather than being increased by 0.5ppt. This proposed VAT increase would have generated an estimated R13bn in additional revenue, with a cumulative effect over the Medium Term Expenditure Framework (MTEF) period. However, bracket creep will still be implemented, which is expected to generate an additional R18bn in revenue.

The decision to cancel the proposed VAT increase, which was incorporated into the fiscal framework, necessitates a reduction in spending to maintain a neutral impact on the budget deficit. The Minister has indicated that estimated revenue will fall short by approximately R75 billion over the medium term. Consequently, expenditure adjustments will be made as the Appropriation Bill and the Division of Revenue Bill are withdrawn and amended in the coming weeks.

Additionally, the previously planned measures aimed at cushioning lower-income households against the VAT increase will be rescinded. These measures included a larger increase in social grants and the zero-rating of certain food items. The increased allocation of R8.5bn to the South African Revenue Service (SARS) over the next three years will be crucial in financing any potential expenditure overruns.

In many respects, the amended Budget 2025 resembles the October 2024 Medium Term Budget Policy Statement (MTBPS) and ICIB’s Budget 2025 Preview. However, a significant change is the deterioration of the GDP growth outlook, which introduces downside risks to the tax revenue forecast.

The revised spending forecast will be critical; specifically, it remains to be seen whether the R18 billion generated from bracket creep can be utilised as a buffer against potential shortfalls in tax receipts or if it will be allocated to support a smaller increase in spending. These dynamics are essential for assessing fiscal metrics, particularly as the debt-to-GDP ratio hovers around 76%.

The IMF has revised South Africa’s growth projections downward by 0.5 percentage points and 0.3ppt, now forecasting growth rates of 1.0% for 2025 and 1.3% for 2026. This adjustment is attributed to deteriorating sentiment driven by heightened uncertainty, the intensification of protectionist policies, and a deeper slowdown in major economies.

According to the IMF's April 2025 fiscal projections, South Africa's consolidated budget deficit is expected to remain persistently high, ranging between 6.6% and 5.6% of GDP by 2030. Consequently, the gross debt-to-GDP ratio is projected to rise from 76.4% in 2024 to 88.7% by 2030.

While the National Treasury has made strides in enhancing its credibility in 2024 to rein in the budget deficit and manage the debt-to-GDP ratio, the depletion of cash buffers—including the sterilisation deposit of R65 billion, the mining windfall of nearly R200 billion, and the drawdown of R150 billion from the Government Financial Emergency Contingency Reserve Account (GFECRA), of which R100 billion was utilised in FY24/25—highlights the challenges posed by stagnating growth and increasing spending pressures on fiscal metrics.