SOUTH AFRICA: Fiscal consolidation remains on track in compromise budget
Metodi Tzanov
Helping finance professionals understand what is going on in Emerging and Frontier Markets
The Treasury tabled a revised budget in parliament on Mar 12 after the first version was delayed due to disagreements. The revised draft, which still does not have the support of the junior coalition partner in the government, the DA, keeps fiscal consolidation on track but there is some relaxation in both deficit and debt targets over the medium-term framework. Considering that fiscal space is already limited and that the Treasury had to balance the interests of the two main parties in the government, it seems like a decent compromise budget. However, DA leader John Steenhuisen said the party would not support this budget and warned that the governing coalition was at risk. Steenhuisen said the budget would make South Africans poorer but Godongwana said earlier the DA had agreed to the 0.5pps hike in the VAT rate this year and had a problem with other concessions outside of the budget process (including Expropriation law and BELA Act).
GROWTH
The subtitle of this year's budget is Investing for Faster Growth with a focus on electricity, rail, water and transportation infrastructure projects. It underscores the ambition of the government to implement reforms and boost investments in order to generate faster growth. Economic growth surprised to the downside last year and the Treasury revised its estimate to 0.8% in 2024 from 1.1% it projected in the MTBPS released in October 2024. The downside revision reflected weakness in agriculture and transport which resulted in a contraction in Q3 GDP, although it was mitigated by a recovery in Q4 supported by firmer household spending.
This year, the Treasury forecasts an acceleration to 1.9% and medium-term growth of 1.8% until 2027. Final household consumption is projected to rise by 1.9% in 2025 (1.0% 2024 estimate), government consumption is expected to rise by 3.8% (1.5% in 2024) and GFCF is seen soaring by 5.0% after it contracted at an estimated rate of 3.6% in 2024. Cooperation with the private sector in energy and transport as well as the rapid implementation of structural reforms is expected to unlock investments that will underpin the acceleration of growth in the following three years.
It should be noted that while an acceleration of growth is possible at these rates, risks also abound that are not insignificant. Chief among them is the ability of the government to proceed with speed and resolve to restructure and deregulate the economy but potential external shocks cannot be ruled out considering the large shifts in economic policies pursued by major economies.
The infrastructure boom is predicated on the pledged ZAR 1.03tn spending on public infrastructure projects over the next three years by SOEs, other public entities, and national, provincial and local government. This includes ZAR 402bn for roads (incl ZAR 100bn spending by SANRAL), ZAR 219.2bn for energy and ZAR 156.3bn for water and sanitation. The 2025 Budget adds ZAR 46.7bn for infrastructure project over the next three years.
REVENUE
The revenue side of the budget continued to underperform in 2024/25. Gross tax revenue will reach ZAR 1,846bn which is ZAR 16.7bn below the projections in the 2024 Budget Review. The gross tax revenue is expected at ZAR 1,978bn in 2025/26 without the tax changes. However, the Treasury proposes to raise additional ZAR 28bn in 2025/26 to boost gross tax revenues to ZAR 2,006bn. The Treasury will raise the VAT by 0.5pps to 15.5% effective May 1, 2025 but this will add only ZAR 13.5bn to the revenue stream. The Treasury said it opted for a VAT hike as it is a tax on consumption that is mostly paid by the higher-income households. The Treasury estimates that 72% of VAT revenue is derived from households in the top four expenditure deciles which consume the most. The Treasury plans to protect the poor households by expanding the zero-rated VAT list at the cost of ZAR 2bn to the revenue side.
In addition, there will be no adjustment in the general fuel levy (for a number of years now) which will cost another ZAR 4bn in lost revenues. This will be partially offset by a hike in alcohol and tobacco taxes, adding ZAR 1bn in revenue. The main increase in gross tax revenue will be generated by skipping the inflationary adjustment to tax brackets (ZAR 18bn) and medical tax credits (ZAR 1.5bn).
The VAT rate will increase again in 2026/27 by another 0.5pps to 16% effective Apr 1, 2026. This will add ZAR 15.5bn to the revenue stream. Overall, tax proposals in 2025/26 amount to a modest ZAR 28bn and in 2026/27 to ZAR 14.5bn. The changes in these taxes will have a net impact on gross tax revenues in the amount of ZAR 28bn in 2025/26 and of ZAR 44.16bn in 2026/27.
EXPENDITURE
Consolidated government spending will increase from ZAR 2,403bn in 2024/25 to ZAR 2,592bn in 2025/26. Close to 61% of this budget is allocated to the so-called social wage (i.e. spending on health, education, employment programmes and grants).
The spending pressure that the 2025 Budget is funding amount to ZAR 232.6bn over the medium term. As part of these pressures will be funded by drawdowns on provisional allocations and contingency reserves, the net increase in non-interest expenditure over the medium term will amount to ZAR 142bn. The main sources for this additional spending are the investments in critical infrastructure, the higher than anticipated wage settlement, and social protection (SRD grant). Importantly, the Treasury left the allocation for SRD at ZAR 35bn in 2025/26 but also made provisions for the two outer years at additional ZAR 75.16bn.
The Treasury increased spending on infrastructure and public sector wages. Infrastructure spending has been allocated an additional ZAR 46.7bn in 2025/26 which was partially funded by ZAR 24.6bn drawdown on the provisional allocation of the Infrastructure Fund. The increase in public sector wages will cost an additional ZAR 7.3bn in the first year, ZAR 7.8bn in the second year and ZAR 8.2bn in the third year. These increases will be partially funded by a drawdown in contingency reserves. In addition, the Treasury will incentivize workers over 55 to retire early without a penalty and will spend ZAR 11bn on this initiative to reduce headcount over the next two years. The Treasury estimates preliminary savings of ZAR 7.1bn each year over the medium to long term and these savings will be retained by departments.
FISCAL DEFICIT
Amid pressures on the spending side, the Treasury continues on a course of fiscal consolidation, targeting a deficit of 3.3% of GDP in 2027/28 from 4.7% expected in 2024/25. However, this consolidation should have been achieved a year earlier in 2026/27, according to the 2024 Budget Review. The budget deficit target in the current 2024/25 fiscal year slipped to 4.7% of GDP instead of 4.3% planned in the previous budget. In addition, the Treasury now projects a deficit of 4.4% in 2025/26 instead of the 3.9% projected in the previous budget.
DEBT
The Treasury continues to rely on achieving primary main budget surpluses to support responsible borrowing and spending and arrest the rise in debt. Debt is expected to reach a peak in 2025/26 at 76.2% of GDP. The primary budget surplus is projected at 0.5% of GDP in 2024/25 and will increase to 0.9% in 2025/26. The surpluses are planned at 1.6% and 2.0% of GDP in the following two years. Even though the Treasury achieved a primary surplus this year, total gross loan debt will exceed the target set in the 2024 Budget Review and will reach 76.1% of GDP instead of 74.1%. Although the government plans to stabilize debt in the 2025 Budget Review, it remains to be seen if these plans are achieved. Much seems to depend on the ability of the government to achieve the GDP growth targets which are ambitious and would require a much better coordination within the GNU. Headwinds from the global environment could also disrupt these plans by affecting sectors exposed to tariff wars.