The 2025 budget has drawn a mixed response from economists, who largely agree that it contains measures to foster economic growth and maintain fiscal discipline while placing additional strain on consumers through tax hikes and a lack of relief for personal income taxpayers.
“Although it has pro-growth components, it still remains a pretty elite budget in that your personal income taxes of R811m are less than the public sector wage bill of R822.8bn and your debt service cost of R424bn is a lot larger than your corporate income tax take at R331bn,” said Frank Blackmore, lead economist at KPMG SA.
KPMG’s Joubert Botha said that the lack of inflationary adjustments to tax brackets and rebates would generate R19.5bn in additional revenue, but at the cost of real disposable incomes.
The R402bn allocated for transport and logistics, R219bn for energy and R156bn for water and sanitation were positive developments, but Blackmore stressed that “we are talking here about the budget itself and not the actual implementation ... that will still have to come to light”.
Similarly, Standard Bank’s Elna Moolman pointed out that the government remained committed to fiscal consolidation while making “generally pragmatic adjustments from the initial budget”, referring to the phased-in VAT hike and spending reallocations.
“The adjustments made to the original budget largely matched our expectations,” she said, adding that the budget was positive for financial markets “if it gets enough support from the GNU (government of national unity) to be adopted”.
She called it a “reasonable compromise between the interests and preferences of the major GNU partners”.
Independent economist Elize Kruger, however, was more critical, arguing “the reality of consecutive years of dismal economic growth has come home to bite all South Africans”.
She warned that the government continued “unabated to spend as if there is no constraint”.
While government has taken the strategy that additional spending plans need additional funding, a reduction in irregular expenditure, unauthorised expenditure and wasteful and fruitless expenditure would have gone a long way to prevent any VAT increase
— Elize Kruger, independent economist
“The cumulative impact of government’s inability to create a conducive environment for businesses to flourish and for the economy to grow resulted in the number of unemployed people growing year by year, with the number of people receiving social grants reaching 27.1-million, with a cost of R267bn per annum in the 2025 financial year.”
She noted that the government had also been “unable to rein in the state wage bill, always budgeting for an inflation increase and always giving in to unions and ending up paying above-inflation increases”.
“This trend will cost the fiscus R23.4bn more than budgeted for in the next three years. Over time, this has resulted in SA civil servants [being] among the best paid in the world.”
Blackmore said the most important pro-poor expenditure — education, health and social grants — along with infrastructure spending of about R270bn still amounted to less than the combined total of public sector wages and debt service costs.
“Agriculture growth remains constrained by the deteriorating logistics infrastructure, such as the dilapidated roads that increase operational costs,” Paul Makube, FNB senior agricultural economist, said.
“Further investments in both rail and road facilities and services will help unlock expansion as envisaged in the country’s Agriculture and AgroProcessing Master Plan (AAMP), a product of collaborative effort by government, agribusiness, labour, and civil society to revitalise and grow the sector.”
Household consumption, inflation and VAT woes
In the revised budget, the Treasury decided to raise the VAT rate by 0.5 percentage points in each of the next two years, bringing VAT to 16% in 2026/27 (an increase of only one percentage point instead of the previously proposed two percentage points).
This way, the Treasury plans to raise R28bn in 2025/26 and R14.5bn in 2026/27.
A major concern among analysts is the effect of these increases on household spending, albeit gradual. While the Treasury has attempted to soften the blow with an expanded list of zero-rated items and social grant increases, the consensus is that consumers will feel the pinch.
Kyle Mandy, PwC SA tax policy leader, pointed out that the “significantly increased element of fiscal drag for personal income tax in the revenue proposals will ... be more harmful to economic growth”.
Mandy also warned that “two VAT increases in the space of a year will likely create a significant burden on business to implement the required changes to their systems”.
Blackmore said that with tax brackets not adjusted for inflation, “even if your real income hasn’t increased over the last two years, you could be finding yourself in a higher tax bracket just based purely on the nominal increases in your income”.
Kruger estimated that VAT hikes would lead to a 6.7% effective cumulative increase in the price of VAT-liable products over two years, warning that “the bulk will have a negative impact on consumption expenditure”, despite the government’s efforts to protect the poorest households.
Fiscal outlook: Consolidation, but at what cost?
A recurring theme among economists is that while the budget aims for fiscal sustainability, trade-offs have been made that will affect economic activity.
“If available tax revenue is insufficient for the planned expenditure, there are only three options to consider,” Kruger explained. Reduce spending plans to match available revenue; increase revenue to meet the level of expenditure; or increase debt to finance the shortfall, pay interest on the debt and postpone the settling of the shortfall to future generations.
“Government has been leaning towards the third option for the greater part of the last 15 years, with dire consequences to our interest bill and debt levels,” she said.
Although it has pro-growth components, it remains a pretty elite budget in that your personal income taxes of R811m are less than the public sector wage bill of R822.8bn and your debt service cost of R424bn is a lot larger than your corporate income tax take at R331bn
— Frank Blackmore, KPMG lead economist
She pointed out that “interest payments will consume almost 22% of each rand of tax revenue in FY25”.
Her concern is further reinforced by her breakdown of consolidated expenditure, which reveals that 66.1% of total government spending is absorbed by just three items — the state wage bill (31.7%), interest on state debt (16.4%), and social grants (18.0%). This leaves only 5.2% for capital investment — the kind of spending that could drive long-term economic growth.
She pointed out that reducing wasteful expenditure, irregular procurement and over-inflated public wages could have provided a better alternative to tax hikes.
“While government has taken the strategy, and rightly so, that additional spending plans need additional funding, a reduction in irregular expenditure (R20.7bn in FY24), unauthorised expenditure (R2.2bn in FY24) and wasteful and fruitless expenditure (R193m in FY24), in total about R23.1bn, would have gone a long way to prevent any VAT increase.”
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