The Treasury has largely managed to maintain its fiscal consolidation course in its latest budget, despite renouncing a one percentage point VAT increase over two years in the face of political party opposition and a court challenge.
This is despite the May budget — tabled on Wednesday by finance minister Enoch Godongwana — signalling slippage in gross debt to GDP over the next three years, compared to the March budget.
Godongwana said in a media briefing before his budget speech in the National Assembly that the government was still committed to its fiscal targets, namely a growing primary surplus; a peak of debt to GDP in 2025/26 and a downward trend thereafter; and an emphasis on infrastructure spending though not to specific figures, which might change.
“Fiscal sustainability remains the core,” Godongwana stressed, replying to a question about whether the government was winning the battle against debt, despite repeatedly missing its fiscal targets. The cabinet was unanimous that debt was a major problem and could not be increased, he said.
Treasury director-general Duncan Pieterse also said in an interview with Business Day reporters that the government was “still on track with its fiscal consolidation”, noting the budget had had to compensate not only for the reversed VAT increase but also a lower economic growth outlook relative to to the March budget, lower revenue, lower nominal GDP and a higher peak of the debt-to-GDP ratio.
Staying on the fiscal path was aided, he said, by a lower gross borrowing requirement over the medium term, a higher primary surplus and a lower budget deficit than the March budget forecasts.
Civil society organisations will probably be concerned with how spending additions proposed in the March budget have been cut by R53bn over the next three years including no provision for the Covid-19 social relief of distress grant in 2026/27 and 2027/28 (R75bn), a reduction of R30bn in proposed additions to front-line services such as health and education, cuts in infrastructure spending and a halving of the amount allocated for the early retirement of government employees.
The May budget reduces anticipated revenue and spending but Godongwana said in his budget vote speech that “baseline allocations across all spheres of government remained largely unchanged”. However, he added that the VAT reversal “significantly reduced our ability to fund additional government programmes and projects to the extent we had deemed necessary”, especially due to the major budgetary shortfall identified for social services.
The shortfall arising from the VAT increase reversal and weaker economic growth has been offset by reductions to provisional allocations not appropriated. Gross government debt will stabilise in 2025/26 at 77.4% of GDP, higher than the 76.2% forecast in the March budget, declining to 77.2% (75.9%) and 76.7% (75.1%) in the outer years.
Pieterse explained that the higher peak in debt to GDP relative to the March budget was due to the downward revision to nominal GDP and lower inflation. Over the next three years, nominal GDP — the denominator for the ratio — will be lower by R466bn relative to the March budget. He said what was important was that the debt-to-GDP ratio peaked in 2025/26 as forecast and that the fiscal path would be maintained unless there were very large revisions to nominal GDP in the future.
The consolidated budget deficit rises to 4.8% in 2025/26 compared to 4.6% in the March budget, falling sharply to 3.8% in 2026/27 (the same as in March) and 3.4% (3.5%) in 2027/28, due to anticipated higher revenue. The primary surplus (when budget revenue exceeds noninterest expenditure) is forecast at 0.7% of GDP in 2025/26, rising to 2.1% in 2027/28.
The Treasury has significantly reduced its March budget growth forecast from 1.9% for 2025 to 1.4%, followed by 1.6% (1.7%) and 1.8% (1.9%) for 2026 and 2027 respectively, to give an average of 1.6% (1.8%) over three years.
The budget overview noted that “domestic risks have tilted to the downside”. Pieterse noted the international environment was characterised by “trade volatility and policy uncertainty. As global growth has faltered, SA’s economic growth outlook has also weakened. Global risk and economic weakness reinforce the need for us to put our fiscal house in order”.
Tax revenue and levies
Consolidated budget revenue falls by R21.9bn to R2.2-trillion compared to the March figure of R2.222-trillion. The budget overview noted that compared to the March estimates, medium-term tax revenue projections had been revised down by R62bn due to the reversal of the VAT increase and the lower economic growth forecast.
Gross tax revenue of R1.986-trillion is forecast for 2025/26 compared to the R2-trillion March forecast. Tax measures amounting to R20bn will be proposed in the 2026 budget.
To partially replace the revenue lost from the reversal of the VAT rate increase, an inflationary increase in the general fuel levy for petrol and diesel by 16c to R4.01/l and 15c to R3.85/l, respectively, will be introduced effective from June 4 2025. That would be expected to generate R3.5bn in 2025/26. No increase was provided for that in the March budget.
The tax proposals in the March budget related to no inflationary increase for personal income tax brackets, transfer duties and excise duties remain unchanged. The tax-to-GDP ratio is expected to reach 25.7% by 2027/28, slightly higher than the 25.4% projected in March.
The budget projects total consolidated spending growth averaging 5.4% annually over three years with the social wage accounting for 61% of consolidated noninterest spending, economic development growing by an average of 8.2% and infrastructure 11.1%. Consolidated expenditure (after debt service costs and the contingency reserve) amounts to R2.578-trillion for 2025/26 compared to the March figure of R2.592-trillion.
It has been revised down by R69.4bn over three years. The net increase in noninterest expenditure from the 2024 budget amounts to R74bn. Pieterse said “major reforms to state spending and the budget process are under consideration. Public spending is inefficient. Previous spending reviews have identified tens of billions of rand in potential savings from poorly performing programmes that can be redirected in future budgets”.
The budget overview said if savings could be achieved through the implementation of the reviews undertaken since 2013, which identified savings of R37.5bn, there may be no need for additional tax measures of R20bn 2026 budget. They might also not be necessary if the SA Revenue Service (Sars) is able to raise more tax revenue.
Sars is expected to increase debt collection by R20bn-R50bn per year due to its increased budgetary allocation of R7.5bn over three years and Godongwana expressed confidence in his speech that it could raise R35bn.
Relative to the March budget, the amount allocated in provisional allocations to infrastructure has been cut by R12.9bn, to the Passenger Rail Agency SA by R6.9bn, front-line services by R29.5bn including a R9.5bn cut for education (for compensation of employees and expansion of early childhood development), a R8.2bn cut for health for compensation of employees and a R2.2bn cut from the allocation for the department of home affairs for digitisation.
The above inflation increases for social grants for this year were retained but no provision for that was made in the outer years because they were linked to the now-reversed VAT increase.
The amount allocated for the early retirement programme for government employees has been reduced to R5.5bn from R11bn over two years and the targeted number of employees has been reduced accordingly from 30,000 to 15,000, partly due to delays in implementation.
An amount of R2bn is released by the early SANDF withdrawal from Democratic Republic of Congo. The provincial and local government allocations of R767.8bn and R176.8bn for provincial and local government allocations in 2025/26 remained unchanged from the March budget.
Tax revenue for 2024/25 was R8.9bn higher than estimated in March and was expected to amount to R1.99-trillion in 2025/26. However, due to the VAT reversal and lower economic growth, tax revenue projections are R61.9bn lower over the medium term than the March budget.
The gross borrowing requirement was projected to decline by R30bn between 2024/25 and 2027/28 due to lower projected spending relative to the March figures and was projected to amount to R588.2bn in 2025/26, R434.3bn in 2026/27 and R587.7bn in 2027/28. Servicing government debt would cost R1.35-trillion over the next three years. The contingency reserve over the three years would amount to R21.6bn.
The latest budget reaffirmed previous commitments that over the next three years, broader government would invest more than R1-trillion in infrastructure, Godongwana said.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.