Budget reaction

"The updated South African National Budget for 2025, tabled on 12 March, tries to balance the need to address the country's fiscal challenges while aiming to stimulate economic growth and improve public services.

Over and above these priorities, it also had to balance political pressure from the Government of National Unity.

The National Treasury anticipates real GDP growth in line with market expectations over the medium term, driven by an improved energy outlook, moderating inflationary pressures, and an easing interest rate environment. However, this optimistic outlook is tempered by potential downside risks, including global trade disruptions and geopolitical events that could impact South Africa's small open economy.

In these uncertain economic times, it is important to view forecasts in terms of scenarios. Treasury's scenario modelling presents two contrasting outcomes: an upside scenario with rapid infrastructure investment leading to increased energy security and business confidence, resulting in a peak GDP growth of 2.7% in 2025; and a downside scenario where global economic slowdowns and trade fragmentation result in subdued business activity and higher inflation, causing GDP growth to slow to 1.5% in the same year. In terms of the trade and foreign policy volatility we are seeing coming from the US, there is likely to be a significant pressure on the downside to South Africa’s economic growth outlook.

Inflation is expected to settle at lower levels compared to previous forecasts, thanks to more moderate tax increases. The debt-to-GDP ratio is anticipated to stabilise at a higher level than previously predicted, peaking at 76.2% in 2025/26 and tapering off to around 70% by the start of the next decade.

The key item that was 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 while anchoring debt at sustainable levels. The initial proposal for a 2% VAT hike faced significant backlash, leading to this revised plan with more tempered increases: a 0.5 percentage point hike in 2025 and another in 2026. Revenue is also supported through avoiding infation-linked adjustments to personal income tax, rebates, and medical credits. The VAT increase is expected to generate additional revenues of around R43 billion over the medium term, which will be allocated to early childhood development, education, healthcare, and infrastructure development.

The budget outlines several other tax measures, including increases in excise duties on alcoholic beverages and tobacco products, and an increase in the fuel levy. These measures, along with the effective increases in personal income tax collection, are expected to raise additional revenues relative to 2024/25 estimates. However, to support low-income households, the Treasury has gone ahead with expanding the zero-rated food basket.

The budget also emphasises the need for future expenditure increases to be financed through a combination of deprioritising underperforming programs and implementing additional tax measures. This includes a proposed tax on foreign retirement fund payouts and 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, leading to a significant rise in debt from 24% of GDP in 2009 to 74% in 2024. This has resulted in increased debt service costs, which now consume 21% of tax revenue, reducing 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, or a principle-based framework integrated into parliamentary processes. The goal is to enhance fiscal discipline, transparency, and sustainability, ensuring that future administrations are not burdened by unsustainable fiscal commitments."