SA needs GDP to go to 3% or higher

Sustained GDP growth at 3% or higher is the best way for South Africa to address socioeconomic challenges like fiscal debt, inequality, poverty, and unemployment. Economists and financial market commentators have been saying this for decades; but the South African government appears hell bent on following its redistributive and/or radical economic transformation (RET) masterplan.

Wrong turns on a questionable roadmap

The country is following the wrong macroeconomic roadmap, and the chosen route is blighted by business-unfriendly policies and looming legal challenges against ill-thought laws like BELA, the Expropriation Act, and the National Health Insurance (NHI) Act. Uncertainty has destroyed growth, evidenced by South Africa limping along at an average of less than 1% GDP growth per annum going back over a decade. Alas, now that the policy is being locked in, business and households are finally cottoning on that they are not growth accretive. 

Your writer’s introductory cynicism can be tempered by the upbeat National Budget 2025 messaging from the likes of audit giant PwC and global financial institution, Investec. In a recent special edition of the ‘No Ordinary Wednesday’ podcast, radio host Jeremy Maggs put a trio of Investec economic and financial market gurus through their paces. Investec chief economist, Annabel Bishop, fielded the first question regarding the macroeconomic landscape immediately following President Cyril Ramaphosa’s State of the Nation Address (SONA) and just days before the Minister of Finance’s 19 February 2025 budget presentation. 

Reflecting on the lost decade/s

“South Africa has come through a particularly weak period, and it looks like our 2024 economic growth number will come in at just 0.5%,” Bishop said, confirming your writer’s opening lament. She commended government and the private sector for the progress made in eliminating loadshedding but was less upbeat over progress in the freight and logistics sector. “We are going to be looking at the growth stimulatory measures in Budget 2025, and expect those to be focused on infrastructure,” she said. The hope is for inflation to tail off to around 3.5% in 2025, and for growth to grow to 3% or higher over the short-term. 

Bishop reminded the audience that South Africa was a small open economy that was very dependent on the global economy, perhaps sounding a warning over recent developments in SA-US relations. Chris Holdsworth, Chief Investment Strategist at Investec, agreed that weak GDP growth had been a defining macroeconomic characteristic for the country, spanning decades. “The consensus forecast for growth this year is for 1.5% to 1.7%, rising closer to 2% in 2026; that puts us in the bottom 20% of countries across the globe,” he said, adding that government would not have to do much to improve on today’s “rock bottom expectation” for the economy. Case in point, ongoing improvements at Eskom and Transnet could easily chip in 2% to 3% of growth over the coming years. 

Responsible and sustainable, but subdued

In its pre-budget commentary, titled ‘Responsible growth for a sustainable future’, PwC wished for Budget 2025 to, “be encouraging to the business community and lift business sentiment by providing an update on progress made in key economic and structural reforms, [including] solutions towards the country’s energy and logistics challenges.” Their three-year GDP forecast was more conservative than that dished up by National Treasury and the South African Reserve Bank (SARB) rising from 0.5% in 2024 to 1% this year and just 1.5% in 2026. And the magical 2% mark is not even breached in 2027. 

Returning to the podcast, Maggs shifted focus to the nuts and bolts of Budget 2025 by asking how the Minister of Finance might tackle fiscal debt. “The real problem South Africa is facing is there is just not enough revenue. And, over the past decade the trend has been for fiscal slippage or a worsening of government finances,” Bishop responded. The country’s debt to GDP ratio is forecast to peak at around 75% over the next three years. The economist flagged borrowing costs, credit ratings agency downgrades, and currency devaluation as key challenges before singling out economic growth (over taxation) as the best way to boost government revenue. 

Debt was top of mind at PwC too. The firm observed that the rising debt burden had been a concern for an extended period of time: “fiscal slippages mean more borrowing will have to be done over the medium term.” They predicted that government would kick the can down the road on reducing the debt burden, and that the Minister of Finance might deflect from this ‘failure’ on the basis that borrowings would be directed towards infrastructure which would boost growth and filter through to higher tax revenues. If only households could borrow cash on the basis that their income might improve at some future date. 

According to PwC, the Minister would do well to “reflect on some good news around public sector finance” with the goal of coaxing positive re-ratings from credit ratings agencies. S&P Global Ratings revised our sovereign ratings outlook to positive from stable in November 2024; but further reviews are necessary before the country completes the round trip back to investment grade. 

Two or three notches to climb

“South Africa is two to three notches below investment grade at this point,” said Holdsworth, as the Investec panel touched on the credit ratings issue. He suggested that we might benefit from one level of upgrade this year, on the basis of the country performing slightly better than expect on its debt to GDP ratio. The agencies are forecasting 80% versus government’s 75-77% prediction. “To achieve an extra one to two upgrades we need GDP growth to trend towards 3%, and that pans out over two to three years,” he said. This three-year base case could fall apart in the event of an economic shock, such as recession. 

FAnews readers, many of whom work as intermediaries in the insurance and investment sectors, will be monitoring Budget 2025 for any significant tax shocks because changes to corporate or income tax, or hikes in the VAT rate, will impact the businesses and households they advise. The experts shared the good and bad news in a single phrasing: South Africa is already taxed to the hilt, there is not much room for the Minister of Finance to introduce significant changes in the 2025-26 tax year. Bishop argued that government could achieve “across the board” tax revenue increases by simply growing the economy. 

“If you grow the economy, you get higher revenue coming from VAT; from corporate and personal income tax; from Customs and Excise; etc,” Bishop added. She touted improvements at Eskom, and pending improvements at Transnet, as game changers in the GDP growth equation. The sense was that GDP growth would surprise on the upside if government and the private sector follow through with promised improvement in the well-publicised Business for South Africa (B4SA) focus areas of energy; crime and corruption; and transport and logistics. 

Financial advisers best brush up on tax

This does not mean that financial advisers can rest easy. The South African Revenue Services (SARS) is still going to be out for its share. “Fiscal drag has become a very easy source of revenue in previous budgets,” warned Tertia Jacobs, Treasury Economist at Investec. She reminded the audience that government could ‘scoop’ an easy R15 billion per annum in additional income taxes by not adjusting personal income tax brackets. “The ongoing failure to adjust brackets is becoming very damaging to household balance sheets,” she said. Sin taxes on alcohol, sugar and tobacco will likely increase; but the threatened wealth tax will likely not materialise. 

Your writer recently attended a recent RGA Outlook 2025 webinar presented by Efficient Group Chief Economist, Dawie Roodt. In his usual no-holds-barred style, Roodt opined that squeezing extra revenue from South Africa’s “very narrow tax base” would be difficult. He also warned that tax policy had breached the so-called Laffer Curve, meaning that further hikes in tax would result in less revenue being collected. “If you want to help the poor then you do so on the expenditure side of the budget, not on the revenue side,” Roodt said, dissing proposals to expand the list of zero-rated goods for VAT. 

The economist pooh-poohed NHI and the promised R100 billion-over-five-years Black Economic Empowerment (BEE) fund, asking where the money would come from. Indeed, money is too tight to mention. During the Investec panel discussion, Jacobs pointed out that taxes were becoming destructive, adding that there was little government could do to rein in its expenditure. “There is not much space for government to increase spending [either] because we need to consolidate the budget deficit,” she said. 

Balancing debt and economic growth

Maggs closed the discussion by asking about the one ‘big thing’ each of his panellists would be watching come 19 February. Bishop said she would immediately turn to the debt-to-GDP forecast because that measure informed the rest of the analysis. Additionally, she asked for clearer guidance on inflation targeting. Holdsworth agreed with the first point, saying that the debt ratio mattered for the fixed income market, and (indirectly) the equity market. Jacobs shifted focus, wishing for “big announcements around how the municipalities would be fixed.” 

Fixing municipalities would be a game changer for GDP growth; and GDP growth would be a salve for most of what ails South Africa. The really good news is that a domestic growth revolution is not impossible. “We can get this economy to grow at 7% or even higher within a year, if we do the right things,” Roodt said. “If we can grow this economy at 4% to 5%, we can start making a real dent in unemployment; but at the current high target of 3% we are not going to make much progress.” Your writer could not think of a better note on which to close. 

Writer’s thoughts:

Budget 2025 looks certain to bring more of the same: cautious optimism from analysts, restrained policy shifts, and government tripping up over fiscal discipline promises. How do you see the budget impacting you and your clients’ financial planning strategies? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.