Old Mutual Wealth comments on the Budget Speech

Old Mutual Wealth Investment Strategist, Izak Odendaal

Compared to the fireworks of the first two proposed Budgets the third version was decidedly uneventful. However, in this context, boring is good, and the financial market response was muted. The key thing from investors’ point of view is that fiscal consolidation remains the priority. The debt and deficit ratios are similar to what was presented in March, though they are somewhat worse, partly due to weaker expected nominal growth. As a result of changes in US trade policies, global growth is expected to be lower and the domestic real economic growth outlook has been cut to 1.4% for 2025, 1.6% for 2026 and 1.8% for 2027. This is broadly in line with private sector estimates. Inflation is likely to be somewhat lower, reducing nominal growth. Weaker nominal growth tends to put downward pressure on tax collection.

Treasury will maintain a primary surplus, meaning that tax revenue is projected to exceed non-interest spending. It will rise over the medium term from 0.7% to 2.1% in 2027/28. The main budget deficit, which includes interest payments, is expected to continue narrowing over the medium term, reaching 3.2% of GDP by 2027/28. As a result, the debt-to-GDP ratio is expected to peak in the current fiscal year at 77.4% and drift lower over time.

Because of the high interest rate the government pays, debt-service costs are substantial. Interest payments will consume 22 cents of every rand SARS collects in but is also expected to peak and decline over time. As this debt-service burden gradually falls, there will be more room to spend on other important areas.

There will be no VAT increase this year, as expected. However, unspecified tax hikes are pencilled in from next year (around R20 billion per year), suggesting a small VAT hike could be back on the table, but Treasury will be sure to get political buy-in beforehand. If SARS improves collection, tax measures will not be necessary (SARS will get R4 billion to strengthen its capacity). As might be expected given the decline in global oil prices, the fuel levy will rise in line with inflation (by 16 cents/litre).

Without revenues from a VAT hike, some of the additional spending proposed in the first two attempted Budgets will be rolled back. Nonetheless, there is still a R180 billion increase to the baseline over the medium term, compared to R233 billion in Budget 2.0. This will support frontline delivery and infrastructure spending. Treasury plans to spend R1 trillion on infrastructure over the medium term. This a big number, but implementation will be key.

Debt is projected to stabilise at 77.4% of GDP in 2025/26, somewhat higher than the 76% projected in the March Budget. This is largely due to a lower denominator, as nominal economic growth will be slower – partly due to lower expected inflation.

Debt-service costs will consume 22 cents of every rand collected in revenue in 2025/26 – but this is expected to be the peak. As this interest burden gradually declines, there will be more room to spend on other important areas.

Treasury notes that spending reviews have identified “tens of billions” of savings that will be applied to future budgets and could possibly mitigate the need for tax measures in 2026.

There was no announcement of a lower inflation target, as discussions between Treasury and the SA Reserve Bank is still ongoing. With April inflation printing 2.8% this morning, it raises the odds of further rate cuts this year.

In a nutshell, the Budget is broadly neutral for markets in the short-term, though the outcome of President Ramaphosa’s meeting with President Trump in Washington could still move markets later today. The 2025 Budget represents broad policy continuity despite the various procedural disruptions. The country is still trying to rein in borrowing and stimulate economic growth. Evidence that this is happening will be positive for market valuations and lead to improved credit ratings.

Victor Mupunga, Head of Research at Private Clients by Old Mutual Wealth

Unsurprisingly, there weren’t any surprises in the latest version of the budget. The main question coming into Budget 3.0 day was how the minister would plug the R75 billion hole left by the scrapping of the VAT increase. It was a delicate balancing act - cutting spending in some areas while maintaining investment and compensating for the foregone revenue from scrapping VAT.

The final budget remained committed to stabilising the debt-to-GDP ratio in the current year, just as versions 2.0 and 1.0 had, and kept bond issuance unchanged. This consistency is supportive of the local bond market, the rand, and locally exposed companies, even if it was largely anticipated; Treasury’s unwillingness to deviate from its fiscal path has become almost predictable. The decision by Moody’s, the rating agency, earlier this week to reaffirm the country’s credit rating with a positive outlook, days before the budget, highlights the increasing confidence that market participants are beginning to have in the Treasury’s fiscal discipline. This is notwithstanding the need to increase the country’s economic growth rate.

To plug the revenue hole, one notable change from budget 2.0 was the reduction in new spending on front-line services, which had previously been highlighted. Additional expenditure will now be R30bn less than previously announced. Over the medium term, Treasury doubled down on infrastructure. The budget allocated an additional R34bn in infrastructure, bringing the total to about R1 trillion. The bulk of this will be allocated towards roads and energy. In our view, prioritising capital investment will have a more constructive impact on potential growth, particularly when combined with ongoing Operation Vulindlela reforms designed to attract private-sector participation. The key, however, remains the need for strong execution on these critical projects.

Given the added emphasis on SARS’ allocation (an additional R4 bn) and the formal launch of spending reviews, these will be key performance metrics to watch. Treasury did not include any savings estimates in the budget from the reviews but highlighted that any such savings would negate the need for additional tax increases. In our view, this makes the need to see improved SARS debt collection and thorough spending reviews a notable risk worth watching over the short and medium term.

Looking ahead, 2025 growth is now expected to slow to 1.4%, down from previous estimates of 1.9% for 2025. While this does represent an improvement on last year’s sub-1% expansion, it remains well below the 3 - 4% pace regarded as necessary to meaningfully reduce unemployment, alleviate poverty and generate the tax revenues needed for social spending.

Such tepid growth underscores the imperative for a renewed infrastructure push and structural reform. Accelerating capital expenditure alongside reforms to ease business licensing and unlock private investment through reforms within Operation Vulindlela will be critical to lift potential growth.

From an earnings perspective, faster GDP growth directly drives top-line expansion and margin improvement across key sectors. For example, in the construction industry, each percentage point of real GDP has historically translated into 3 - 4% higher order inflows and profit margins. In contrast, sub-2% growth risks sustaining the sluggish revenue and profit trends of recent years. By reigniting a virtuous cycle of infrastructure investment and reform, we can not only lift the macro-outlook but also catalyse a sustained earnings recovery, justifying domestic equity valuations.