Budget Update: an unsurprising budget, still sees fiscal consolidation

2025’s Budget Review saw mild near-term fiscal slippage with a weakening in government’s debt to GDP projections and fiscal deficits, but then a continuation of previous projections’ moves to fiscal consolidation. 

Gross debt of government is consequently now projected to stabilise at 76.2% of GDP in 2025/26. Previously the projection was estimated to peak at 75.5% in 2025/26 in the MTBPS last year. 

The budget deficit for 2025/26 is now estimated at -4.6% of GDP, widening from the prior estimate of -4.3 % of GDP, and expected to reach -3.5% by 2027/28. VAT rose by 0.5%, with no fiscal drag adjustment.

The upwards revision of National Treasury’s economic growth forecasts to 1.9% y/y from 1.7% y/y for 2025, is above our and the consensus forecast (Bloomberg, Reuters), and remains around 1.8% y/y thereafter.

Overall, the Budget is credit neutral versus the MTBPS, with modest fiscal slippage only in the short-term and fiscal consolidation longer-term, maintaining a primary balance. The debt consolidation runs at October’s MTBPS projections. The rand saw little consequent change around R18.40/USD on the Budget.

S&P one of the three key credit rating agencies, (besides Fitch and Moody’s) put SA on a positive outlook (indicating the potential for an upgrade from BB-) in November last year. 

The rationale was “the positive outlook reflects our view that increased political stability following the May general elections and impetus for reform could boost private investment and GDP growth.” . &P is unlikely to drop its positive outlook.

Overall, it is an unsurprising budget from a financial market perspective. Borrowings are largely contained, swelling in the near term as % of GDP mainly on disappointing GDP outcomes.

A better economic environment is needed to raise more revenue, in particular a substantially faster economic growth rate of 3-5% y/y, with tax increases instead subtracting from economic growth.

The Budget’s tax proposals total R28bn. The additional revenue raised mainly comes from no adjustment for fiscal drag, i.e. no adjustment for the effect of inflation on income taxation, totalling R18bn followed by R13.5b from the 0.5% VAT increase.

Medium-term, revenue is just under 28% of GDP.  The 2025 tax proposals increase the overall tax burden, raising the tax take to fund increased expenditure, which rises to 32.4% of GDP this year, but then drops back to near 31% by 2027/28.

Gross tax revenue for 2024/25 is estimated at R1.85 trillion, R16.7bn below the 2024 Budget projection. The average tax-to-GDP ratio is 25.3% from 2025/26 to 2027/28, high for a slow growth EM.

Gross government debt is projected at R5.69 trillion (76.1% of GDP) this year, as debt-service costs stabilise at 22% of revenue. Debt falls towards, but not to 60% of GDP, ration sustainable for an EM.

The rating agencies already include the SOE’s debt in their debt projections for SA, and S&P notes “(w)e forecast gross general government debt rising to 80% of GDP by fiscal 2027 from 75% in fiscal 2023.”

The state projections seem better than this, with gross debt to GDP at 76.1% in 2024/25, 76.2% in 2025/26, 75.9% in 2026/27 and 75.1% in 2027/28, but government does not include the SOE’s debt in their debt projections. 

Consolidated government spending increases at an annual average of 5.6%, with another 0.5% increase in VAT next year (after this year’s VAT hike). 

However, the recent weak economic growth outcome for 2024 is disappointing for financial markets, while the rail and port crisis (subtracting around 4% from GDP growth) and the unemployment crisis persist. 

There is a dire need for much higher tax compliance in SA, achieved through bolstering SARS capacity with the Commissioner estimating this would raise R800bn a year, eliminating the need for tax hikes, while allowing for lower borrowings and so credit rating upgrades and increased investment and growth.