Budget Review: Has the needle moved?

• Fiscal consolidation remains in place. 
• The DA rejects the tradeoff between proposed spending and tax increases. 
• Government bond supply will remain unchanged as there will be a large drawdown in cash balances. While government supply is expected to remain unchanged, the large redemption profile in the next seven years emphasises how crucial it is to raise tax revenues through faster growth. Persistent switch auctions render it challenging to make a dent in the high debt level and keep interest spending costs elevated. The focus remains on the ability to execute infrastructure reforms and focus on growth drivers. 
• The Minister of Finance will initiate a spending review in April 2025, with government departments and provinces investigating areas for savings and enhancing efficiencies. 
• Commitment to fiscal consolidation and keeping bond supply unchanged are constructive for the fiscal risk premium. However, the large redemption profile in the next seven years emphasises the urgency to raise tax revenues through faster growth. 
• Budget processes will be closely followed for timelines if the fiscal framework is not accepted. 

Key focus points 

The key focus points were the reasons why the GNU rejected the February 2025 Budget on Feb 19, 2025. These pertain to a (1) 2ppt increase in VAT to finance a material increase in new spending, of which (2) the multiplier effect on GDP growth is not meaningful. The context is that any unfunded increase in government spending will increase government debt and debt servicing costs, already at elevated levels, and cause a deviation in the path of fiscal consolidation. This commitment, in conjunction with the formation of the GNU in June 2024, has been instrumental in the rerating of the fiscal risk premium on SAGBs.  

Budget math: The tradeoff between smaller spending and tax increases  

February 2025 budget proposals: The February 2025 budget raised non-interest spending by R173.3bn over the MTEF period, financed from a 2ppt VAT increase of R183.0bn. The composition of the new spending showed that only 25% is allocated to infrastructure projects (R46.8bn) and the remaining 75% to current spending. Social grants (ex-SRD grant) have received above inflation increases to compensate for the VAT hike (which is a circular argument) of R23.3bn, early retirement costs (R11.0bn), 2025 public sector wage agreement and carry-through costs (R23.4bn), provisional allocations for frontline services and compensation to education, health, defence, correctional services and home affairs. 

March 2025 budget proposals: There were minor changes in spending consisting of small inflation adjusted increases in social grants due to a small VAT increase. The allocation to Home Affairs to upgrade its digitalisation of services was cut by R3.5bn. Other spending proposals were kept intact, resulting in a net increase in spending of R142.0bn (R31bn less than in February). A smaller tax increase was consequently required to finance the spending increase, which consisted of a combination of two taxes, namely VAT, and another year with no adjustment to tax brackets. The VAT rate is proposed to increase by 0.5ppt pencilled in F25/26 (raising R13.5bn), followed by a further 0.5ppt in F26/27 (raising a total of R29.8bn. By not adjusting tax brackets, R18.0bn is raised in F25/26, with carry over effects of R19.1bn and R20.3bn in the outer years over the MTEF. There were no inflationary adjustments to medical tax contributions, which raises R1.5bn, R1.6bn and R1.7bn. The fuel levy is unchanged, with above-inflation increase in excise duties announced in February 2025. Zero rating of certain food items will go ahead at a cost of R2.0bn, R2.1bn and R2.3bn pa to the fiscus. 

But the growth impact remains limited 

The proposed tax increases for FY25/26 amount to R29bn, a decrease from R60bn in February. However, an increase in personal income tax will erode personal disposable income as the effective tax burden continues to rise and pull lower income groups into the tax base. National Treasury estimates that the VAT increase could reduce GDP growth by 0.07 ppt while adding 0.15 ppt to inflation in 2025 and 2026, respectively.

Spending proposals, such as an increase in infrastructure spending and current spending on enhancing compensation by hiring more personnel in frontline departments, have remained intact, but dealing with the efficiency of spending and accelerating reform implementation are slowly unfolding. Implementing and execution of reforms at Transnet and other SOEs, as well as local authorities, are urgent:  

Transnet: Transnet will not receive a liquidity injection. The guarantee of R47bn may be extended if linked to the R10bn bond redemption in F25/26 and R2bn is provided to specific projects through the BFI. National Treasury noted that faster progress is needed on the recovery plan to improve operations and finances.

Local authorities: Municipalities face governance, accountability, and capacity challenges, with persistent irregular expenditure, rising debt accruals, and declining revenue generation. Conditional grant reforms focus on streamlining, enhancing flexibility and aligning resources with service delivery priorities.

The anticipated multiplier effect of the proposed budget appears to be low, as indicated by the National Treasury's GDP growth forecast of 1.9% for 2025. This growth is expected to be driven by a 1.9% increase in household spending, a 5.0% increase in fixed investment, and a 3.8% increase in government spending. In contrast, ICIB's 2025 GDP forecast is slightly lower at 1.7%, with downside risks noted. For 2026, GDP growth is projected to moderate to 1.7%, raising concerns as cyclical growth momentum takes time to build alongside faster fixed investment growth. Household spending is expected to decline by 1.5%, while fixed investment is to grow by 5.2%. GDP growth for 2027 is anticipated to be 1.9%.

Commitment to fiscal consolidation intact 

Fiscal metrics show that National Treasury's commitment to fiscal consolidation. Forecasts of key fiscal ratios such as the main budget deficit, primary budget balance and gross debt to GDP ratios are mostly unchanged. The main budget deficit is projected at -4.7 of GDP (P: -4.7%), -4.4% (-4.3%), -3.7% and -3.3% from FY24/25 to FY27/28.

National Treasury's de facto fiscal anchor, the primary budget surplus, rises over the MTEF period from 0.5% of GDP (R36.8bn) in FY24/25 to 2.0% (R182bn) in F27/28, showing the vulnerability to meaningful deviations from target for spending and tax receipts. The material increases in government bond issuance in F24/25 bolstered cash balances.

However, this has caused gross debt to grow at a faster clip, which is expected to stabilise in F25/26 at 76.2% of GDP from the February 2024 forecast of 75.3% of GDP. Debt servicing costs remain elevated, with 21.2% of gross revenue allocated to interest payments.  

Financing strategy: Bond supply unchanged with a larger rundown in cash balances 

FY24/25: The closing balance is expected to be R10.2bn higher than the February forecast due to better revenue receipts in January (~R2.3bn than projection) and more cash raised from bond issuance of R7.6bn.

F25/26: The wider main budget deficit of R353.9bn (Feb 25 project of R336.6bn) has raised the borrowing requirement to R582.0bn (P: R564.2bn). The increase will be financed by a larger drawdown of cash balances of R96.4bn (P: R77.5bn).  

Eskom: Financial support to Eskom in F25/26 has been reduced from R110bn to R80bn. The debt swap of R70bn falls away with a cash advance of R40bn, in addition to the initial R40bn earmarked. A further R10bn will be provided in F28/29 (total assistance R20bn less). 

T-bill issuance:  The net increase is projected at R38.1bn from R38.9bn.  

o   91-days: R1.6bn from R1.5bn (net increase of R3.5bn)

o   182-days: R3,55bn to R3.7bn (net increase of R2.9bn)  

o   273-days: 4.6bn to R5.0bn (net increase of R15.9bn) 

o   364-days: R4.9bn to R5.3bn (net increase of R15.9bn)

Long-term bond issuance consisting of SAGBs, ILB, FRNS and a sukuk (?):  Cash generated from issuance is estimated at R343.2bn (FY24/25 R345.0bn). National Treasury announced on February 19th that bond supply will remain unchanged. Two shorter-dated bonds (not specified) with 9- and 15-year bonds will be issued, and switch auctions will continue.

Foreign bond issuance: $5.5bn and a total of $14.6bn over the medium term.