All eyes were on Finance Minister Enoch Godongwana today, following last month’s postponed Budget speech, which some GNU members refused to support. The initial 2% proposed VAT hike drew harsh criticism and was rejected by GNU members who demanded more emphasis on growth.
In the days that followed, the recovery in the rand and bond yields suggested that the market was taking the GNU’s first real test in its stride. Rather than indicating disfunction, the experience demonstrated that the GNU is, in fact, working. Like in any relationship, a compromise is necessary to move forward.
Speculation around what that compromise might look like was rampant leading up to today. Analysts felt a 0.5% to 1% VAT hike, coupled with spending cuts and more explicit measures to boost growth might be sufficient to get the Budget over the line. What transpired was a somewhat consumer-unfriendly Budget, including a VAT hike and no adjustments to compensate for bracket creep. Fiscal consolidation however appears on track, and the deficit is expected to narrow.
VAT, spending cuts and political pushback
The Minister proposed increasing VAT by 1% over the next 2 years; 0.5% in May 2025 and a further 0.5% in April 2026. Importantly, the budget has not yet been approved by Cabinet, and the proposal now needs to be debated and voted on in parliament. Some GNU members, such as the DA have been vocal in arguing against any VAT hike, stating on social media that they will not approve the budget in its current form.
The Minister has a difficult task at hand, because crafting a budget, while simple, is never easy. Whatever remains after deducting expenses from income is what is available (or not) for today and the future. A surplus allows for saving and investment, expanding wealth and future consumption. A deficit, however, means either some belt-tightening or borrowing to fill the hole.
The problem with borrowing is that there is a limit to how much can be borrowed, with rating agencies keeping a close eye on South Africa’s debt to GDP ratio that is now expected to top out at 76.2% in 2025/26. Borrowing also brings forward future consumption, reducing resources further down the line as debt repayments increase. Currently, 22 cents of every rand of revenue is spent on servicing debt.
National Treasury has proposed coupling the VAT increase with the zero-rating of additional essential food items and maintaining the current fuel levy, both measures aimed to support the most vulnerable. However, bracket creep will place an additional burden on South African taxpayers, who already hand over a significant share of their income to the government in taxes. South Africa’s tax revenue as a percentage of GDP is among the highest in the world.
There is arguably still plenty of room for spending cuts, although these are always politically unpalatable. For example, South Africa’s public sector wage bill as a percentage of GDP is the highest in the world. Meanwhile, jobs remain scarce, with our unemployment rate among the highest globally. Social grants will increase this year, but not as significantly as in the previous Budget draft, and no additional financial commitments made to SOEs.
The growth challenge: Can South Africa turn the tide?
The key to solving South Africa’s challenges lies in improving tax collection efficiency and accelerating economic growth. Over the last decade the SA economy has grown at a rate of less than 1% per year in real terms, which is simply not enough to meaningfully grow tax revenues, create jobs and reduce the debt burden.
The local economy grew a meagre 0.6% in 2024, despite virtually no loadshedding. For context, our emerging market, BRICS counterparts, Brazil, Russia, India and China grew 3.7%, 3.8%, 6.5% and 4.8% respectively in 2024, according to the IMF.
Going forward, National Treasury expects growth to average 1.8% over the coming three years, still a far cry from the 3%+ growth rate needed to move the needle. In his budget speech, the minister made mention of the current plans to help foster growth, iterations of which we have heard many times before.
What would be helpful would be increased focus on deregulation as well to support growth, particularly in the context of SA ranking amongst the worst globally in terms of the ease of doing business.
SA’s nominal GDP growth rate must rise above its cost of borrowing to stabilise the debt outlook, which is not the case currently. Ideally, a lower cost of funding would also be helpful, but this requires lenders to buy into the notion that SA, post the establishment of the GNU, is on a structurally different path compared to the last decade.
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