Angelika Goliger | Chief Economist | EY Africa | mail me |
The updated South African National Budget for 2025, tabled on 12 March, tries to balance the need to address the country’s fiscal challenges. At the same time, it aims to stimulate economic growth and improve public services. Over and above these priorities, it also balances political pressure from the Government of National Unity (GNU).
The National Treasury anticipates real GDP growth in line with market expectations over the medium term. This outlook is driven by an improved energy supply, moderating inflationary pressures and an easing interest rate environment. However, this optimism is tempered by potential downside risks. These include global trade disruptions and geopolitical events that could impact South Africa’s small open economy.
2025 Budget Speech reflects contrasting outcomes
In these uncertain economic times, it is important to view forecasts in terms of scenarios. Treasury’s scenario modelling presents two contrasting outcomes.
The upside scenario assumes rapid infrastructure investment. This would lead to increased energy security and stronger business confidence. As a result, GDP growth could peak at 2.7% in 2025. In contrast, the downside scenario assumes a global economic slowdown and trade fragmentation. These factors would result in subdued business activity and higher inflation. Consequently, GDP growth could slow to 1.5% in the same year.
Furthermore, trade and foreign policy volatility from the US is likely to add significant downside pressure to South Africa’s economic growth outlook.
On inflation, Treasury expects it to settle at lower levels compared to previous forecasts. This is thanks to more moderate tax increases. Meanwhile, the debt-to-GDP ratio is expected to stabilise at a higher level than previously predicted. It will likely peak at 76.2% in 2025/26 and taper off to around 70% by the start of the next decade.
The decision around the VAT increase
The key item on everyone’s minds was the decision around the VAT increase. The budget aims to offset fiscal pressures from increased spending with additional tax measures. At the same time, it seeks to anchor debt at sustainable levels.
The initial proposal for a 2% VAT hike faced significant backlash. As a result, Treasury revised the plan to include more tempered increases. There will be a 0.5 percentage point hike in 2025, followed by another in 2026. In addition, revenue will be supported by avoiding inflation-linked adjustments to personal income tax brackets, rebates and medical credits.
Treasury expects the VAT increase to generate additional revenues of around R43 billion over the medium term. These funds will be allocated to early childhood development, education, healthcare and infrastructure development.
The budget outlines several other tax measures. These include increases in excise duties on alcoholic beverages and tobacco products. It also includes an increase in the fuel levy. Together with the effective increases in personal income tax collection, these measures are expected to raise additional revenues relative to 2024/25 estimates. However, to support low-income households, the Treasury has expanded the zero-rated food basket.
Tax revenues vs government spending
The budget also emphasises the need for future expenditure increases to be financed responsibly. This includes deprioritising underperforming programs and implementing additional tax measures. One such proposal is a tax on foreign retirement fund payouts. Another priority is safeguarding the country’s debt profile.
Along with the budget document, the National Treasury released a discussion document on fiscal anchors. South Africa’s fiscal landscape has been marked by persistent imbalances between tax revenues and government spending. These imbalances have led to a significant rise in debt from 24% of GDP in 2009 to 74% in 2024. As a result, debt service costs now consume 21% of tax revenue. This reduces fiscal space for essential public services.
To address these challenges, the National Treasury is considering the implementation of a formal fiscal anchor. This could take the form of a numerical fiscal rule, such as a debt ceiling or deficit limit. Alternatively, it could involve a principle-based framework integrated into parliamentary processes.
The goal is to enhance fiscal discipline, transparency and sustainability. This will ensure that future administrations are not burdened by unsustainable fiscal commitments.
