Budget 2025: Tough choices

The VAT threat to households

• The impact of the proposed 2% VAT on households

  The latest household finances data released on February 27, has shown further improvement in real terms. But this is threatened by the possibility of a 2% increase in VAT, that’s set the stage for a political showdown.

  The Budget Speech for 19th February showed that government was looking to claw back some of the improvement in consumer finances (particularly real income) to meet a near R60bn in revenue for 2025/26.

  Particularly noted in the withdrawn Budget was “(w)e propose to raise the VAT rate by 2 percentage points to 17 percent – a necessary step that will enable us to: Fund public sector wage increases for our civil servants” among other areas.

  “(A) three-year wage agreement … reached” for the public sector “will cost an additional R7.3 billion in 2025/26, R7.8 billion in 2026/27 and R8.2 billion in 2027/28 … the agreement exceeds the 2024 Budget and MTBPS projections”.

  The planned VAT increase received harsh criticism in the face of the increased burden on household finances and weak tax buoyancy of households. 

  The 2% hike in VAT (not expected) would also add heavy pressure to the CPI inflation rate, of near 1% depending on the degree of zero ratings applied.

  Read Annabel's weekly Rand Note here and her regular economic updates here.

South Africa's fiscal crossroads

• Tough decisions ahead

  In Budget Take Two, a key focus will be on the Government of National Unity’s (GNU) capacity to make the constructive fiscal decisions essential for South Africa's economic stabilisation and growth.

  The fiscal risk premium has stabilised, largely due to National Treasury's commitment to stabilising government debt while balancing any new spending with tax increases. However, this approach is not conducive to fostering growth.

  The reality is that there is no room for complacency; tough choices regarding the composition of government expenditure are imperative. Relying on tax increases to finance new spending is unsustainable in the long term.

   

No easy options

• Four potential ways to plug the revenue gap

  Budget 2025 was postponed in February due to political differences over the increasing of value-added tax (VAT) by two percentage points, from 15% to 17%.

  The increase in VAT was expected to raise around R58bn in revenue to cover spending pressures over the medium term.

  It is unclear what alternative methods will be used but the four options are:

  1.        Adjustments to other taxes

  2.        Accessing the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) again

  3.        Reducing spending and/or

  4.        Increasing debt issuance

  It is difficult to reduce spending while it’s also difficult to increase taxes. GDP growth projections for 2025 were disappointing given better energy security and some improvements in logistics. Treasury expects 2024 GDP growth to come out at 0.8% driven by a weak third-quarter print.

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• SA's Budget problem might be smaller than previously thought

  January’s tax data came out last week and the data was strong. Employee tax receipts continue to be robust, up 11% year-on-year.

  Total tax receipts were at R126bn in January, up 9% year-on-year. The net result is that we now estimate there was a R16bn revenue shortfall, down from an estimate of R25bn last month.

  There is still extra revenue to fund but the improved tax receipts in January may take some pressure off National Treasury ahead of the rescheduled Budget speech on 12 March.  

Crucial GDP numbers ahead of Budget 2025

• Changes to GDP projections?

  The budget is expected to be presented by the Minister of Finance, Enoch Godongwana, on 12 March 2025. On 4 March 2025, Statistics South Africa (SA) released Q4 and the full-year GDP data for South Africa which  could negatively influence the GDP growth projections in the budget.

  Initially, we were of the view that GDP growth forecasts were conservative given easing constraints on economic activity. However, the latest data from StatsSA shows that the South African economy remains weak.

  For example, previously National Treasury expected growth to be 0.8% for 2024. The data released by Stats SA showed GDP growth of 0.6% for the full year. It is therefore not outside the realm of possibility that the National Treasury projection of 0.8% could be revised down slightly to reflect the latest data. This could potentially filter through other macroeconomic ratios and forecasts.

  That said, there was a healthy uptick in household final consumption expenditure for Q4 driven by the two-pot system, lower petrol prices and the two x 25 basis point cuts to interest rates. 

  However, this was not enough as both gross fixed capital formation and government spending weighed on economic activity.

  With inflation currently at 3.2% and inflation expectations anchored at 4.5% (the midpoint of the target range), the South African Reserve Bank (SARB) should be able to continue to cut rates, maybe by slightly more than the market expects (50bps as opposed to 25bps).

  Although interest rates cuts are typically inflationary, some inflation would be supportive of better nominal GDP growth too, which is the input for debt-to-GDP.

  Employment numbers have also been strong which is typically an indicator of improving economic activity.