Finance minister Enoch Godongwana pared back extra spending on front-line services and infrastructure and hiked the fuel levy for the first time in three years as he tabled a third version of his 2025 budget that showed the government still on track to stabilise the public debt this year.
But the debt to GDP ratio will now peak at more than 77% of GDP in an economy that is much weaker than expected at the time of the minister’s first attempt at a budget, with the Treasury revising down this year’s growth forecast from 1.9% to 1.4%, rising to 1.8% by 2027 — forecasts which are still higher than some economists now expect given the fallout from the US’s tariff shock.
And though the minister removed his VAT hikes after pushback from the government of national unity and the courts, individual taxpayers will still get no relief from the impact of inflation (so-called fiscal drag) and Godongwana has pencilled an additional R20bn of tax hikes into next year’s budget, without giving details.
Wednesday’s budget came after extensive consultation with the GNU partners that followed the minister’s two failed attempts at a budget. The minister said in his speech it was unsurprising the VAT increase created so much “vital” debate, and though it had created uncertainty, he had listened and there was now clarity that the VAT rate would remain at 15%. “This is what the past two months have provided: valuable lessons that will inform how we manage the budget process going forward.”
With extra VAT revenue out of the picture, the budget cut R68bn from the extra spending proposed in the failed March 12 budget, with much of the impact falling on provisional allocations for front-line services, which were cut from R70.7bn to R41.2bn, with about R10bn slashed from each of health and education. Treasury officials said, however, that the budget had retained money to hire hundreds of unemployed doctors as well as an increase for early childhood education.
Also slashed were above-inflation linked social grants increases meant to cushion the poor from the VAT hikes, as well as additional spending on infrastructure projects, which was reduced from R47bn to R33.7bn. But the SA Revenue Service was a winner — and it is expected to use its extra R7.5bn cash to hire additional debt collectors and modernise its systems, boosting annual revenue by R20bn to R50bn, which could enable the Treasury to cancel next year’s planned tax hikes.
A joint Treasury-presidency team will also push ahead with reviews of inefficient government spending, responding to calls from the DA and others. Deputy finance minister Ashor Sarupen said the reviews would be extended to look at sectors of spending, not just individual programmes, as in the past.
Godongwana said it was not an austerity budget, with noninterest spending growing 0.8% over the next three years in real (inflation-adjusted) terms and baseline allocations largely unchanged. He cautioned, however, that the government was now spending R1.2bn a day to service its debt, more than it spent on front-line services such as health, police and basic education.
Treasury director-general Duncan Pieterse said that though the peak in the debt ratio was higher, the budget was still on track to achieve fiscal targets. Importantly, the gross borrowing requirement was R30bn lower than projected in 2024 and over the medium term lower than the March budget forecast.
The Treasury had not targeted a particular debt level, but it had consistently said over the past two to three years that it should be able to deliver on the path it had set out. “Unless there is a very large revision to GDP, the path we have set out here is one we should be able to maintain,” he told journalists.
The rand was unchanged on Wednesday with the budget coming as something of a relief for the markets, after the political turbulence about it over the past three months.
RMB Morgan Stanley economist Andrea Masia said expenditure had been cut to size and was broadly as expected, and the budget deficit was narrowing faster than expected. “On the whole, this is more bond and equity friendly than the previous two proposals,” he said.
Business Leadership SA CEO Busi Mavuso said the budget was a good outcome given the difficult circumstances, but it was “also a stark reflection of the perilous state of our economy and the difficult reform work we have ahead”.
Though the budget contained no news on SA’s ailing state-owned enterprises, Godongwana went off script in his budget speech with a suggestion he would consider further guarantees to ailing Transnet, which was granted a R47bn guarantee facility in late 2023 but has been denied the bailout it initially sought.
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