Budget 3.0 preview: Only moderate tax increases expected

The new budget on 21st May, after February and March’s versions failed to gain the necessary support, is now expected to give new projections, which include revenue, GDP growth and “determining appropriate borrowing strategies”.  

While the risk is for higher borrowing projections as tax avenues are constrained, VAT increases were rejected and significant income tax hikes are likely to follow the same path, National Treasury has indicated the need to cut expenditure.

Corporate tax increases are not favoured either, given the detrimental impact on growth and employment, while customs and excise hikes are another tax on consumption, although moderate sin tax rises are tolerated and will occur.

An increase in the fuel tax levy is likely to be used to cover part of the funding gap while National Treasury has also recognised the need to bolster tax collections at SARS and has increased the institutions funding.

Expanding the tax base increases tax buoyancy, with SARS having estimated it is owed R800bn in unpaid taxes, while the funding gap for the budget deficit was estimated at -R375bn for 2024/25 in the March budget.

The Finance Minster is also reported to have noted recently that "(t)he revenue collector (SARS) has also detected 156,000 taxpayers who are not registered or have not filed despite their substantial economic activity."

The 2024/25 tax take (gross revenue) is estimated above budget, at R1.855trillion versus the R1.864trillion, with the revenue overrun at close to R9bn. In the March budget R28bn was estimated for 2025/26’s shortfall (amount taxes needed to rise).

The revenue overrun for the last fiscal year, ending March 2025, indicates some relief on the fiscal deficit, which was expected at -4.6% of GDP, and is now forecast at -4.5%, with 2025/26 likely -3.9%, 2026/27 -3.7% and 2028/29 -3.5%.

Finance Minister, Godongwana, has also noted the need to avoid a notable rise in borrowing projections, with 2025/6 likely at 76.4% of GDP, 2026/27 at 76.1%, 2027/28 75.9 and 2028/29 at 75.3%. 2024/5 is expected at 76.0% of GDP.

Avoiding an adjustment for fiscal drag (i.e. inflationary adjustment to tax brackets and rebates), and with no inflationary adjustment to medical tax credits, R19.5bn of the estimated R28bn shortfall would be raised, as per the March budget.

The take from excise duties (sin taxes) is estimated at an additional R1bn in March and may be slightly higher.  Adjusting the fuel levy and not yielding a diesel refund would provide the rest, along with some cuts in expenditure. 

Cutting expenditure is a prudent solution as South Africa is battling to fund its fiscal deficit and needs to consolidate its finances to improve fiscal sustainability and health, while borrowing increases would not be fiscally responsible.

SARS reports tax revenue grew by 6.6% y/y in 2024/25, with personal income tax the biggest revenue component, and seeing growth of 12.6% on strengthening compliance and a growing tax base.

With SA not fully tax compliant, and the tax base growing as non-compliance and outstanding tax debt is eroded, the metrics cannot be used to calculate tax buoyancy, but National Treasury estimates it at 1.24 for this year, 1.12 last year.

For the calendar, as opposed to fiscal, years noted above 2025 is likely to see GDP growth of 1.3% y/y now, revised down from 1.8% y/y at the start of the year, while National Treasury forecast 1.9% y/y in March, but will likely revise this down.

The Bloomberg economic consensus for GDP growth this year is currently 1.4% y/y, and 1.7% y/y for 2026, which aligns with the National Treasury for that year, followed by 1.9% y/y for 2027 versus the consensus of 1.8% y/y (Bloomberg). 

The downwards revisions to growth, particularly for 2025 Treasury is likely to account for some of the likely very slight lift in the gross debt to GDP ratios but, stronger GDP growth, of 3.0%+ y/y, is needed for sustainable state finances.

With National Treasury having indicated it is planning a conservative, prudent budget, financial markets should not have a negative reaction, and nor should the credit rating agencies, although the latter will point to the constraint of weak growth.