The revised budget 2025 this week comes with considerable uncertainty, and controversy, about the likely adjustments to be made to compensate for the politically unpalatable two percentage point VAT hike proposed originally. However, the following critical tenets should remain intact:
Fiscal consolidation: The initial budget preserved government’s commitment to stem the mounting fiscal debt-GDP ratio in the coming fiscal year (FY25/26). The objections to the budget, from GNU partners in particular, weren’t against debt stabilisation but rather against its likely mechanisms (a two percentage point VAT hike in particular). We expect this commitment to remain unwavering in the final budget, with policymakers clearly cognisant of the onerous debt repayment costs (which exceed the cost of all social grants by R171bn per year) as a result of the surge in government’s debt burden (with the debt-GDP ratio rising nearly 30 percentage points over the past decade). This will be the single most important aspect of this budget for financial markets, and could ease investors’ long-standing concern about South Africa’s fiscal sustainability — though, like the ratings agencies, they’d need to also see this materialising to be entirely convinced.
Promoting both pro-poor and pro-growth spending: The initial budget included several pro-poor elements, including an expansion of VAT-zero-rated basic food items, above-inflation social grant increases, no fiscal drag for lower-income groups, appointing more teachers, nurses and other frontline staff, and new government employment programmes. Judging by the value of spending increases, the new pro-poor spending exceeded the additions to infrastructure allocations — the main growth-supportive spending additions. These pro-poor interventions might be trimmed in the upcoming budget as they’d no longer be required to counteract a large VAT hike. We expect the infrastructure boost in the budget to by and large prevail due to the Treasury’s aim to lift South Africa’s trend economic growth rate (in addition to other interventions to unblock growth bottlenecks, including through Operation Vulindlela, the Treasury-Presidency policy implementation unit).
Tough love for SOEs: This approach was intact in the initial budget, with limited additional support for state-owned entities (SOEs). This is one of the ways in which the Treasury aims to improve the fiscal trajectory after more than R600bn of injections for key SOEs over the past decade. Notably, support for Transnet is mainly via project-based infrastructure funding and, in due course, possibly more government guarantees (rather than cash injections), as we expected. Support for Eskom was lowered somewhat (with a debt swap converted into a smaller loan).
While steadfast commitment to stem government debt is at this juncture likely the single most important aspect of the upcoming budget, government’s choices about spending and revenue adjustments are also important; this could materially influence the macroeconomic trajectory. Abandoning the proposed two percentage point VAT hike would reduce government’s annual revenue by about R60bn. A one percentage point VAT hike might be more politically palatable, particularly if accompanied by comprehensive spending reviews that would culminate in sizeable savings in the October 2025 medium-term budget policy statement or the February 2026 budget.
Should VAT be hiked by one percentage point (worth about R30bn), this, alongside fiscal drag (not adjusting income tax thresholds for inflation, worth about R16bn extra), and the typical annual increase in the fuel levy by inflation (worth about R4bn), may largely fill the revenue gap left by not hiking VAT by two percentage points. The expansion of VAT-zero-rated food items may also be reduced (worth about R2bn per year). We doubt that the Treasury would support an increase of either company income tax or personal income tax because the adverse consequences for economic growth would dwarf those of a VAT hike. Further, our income tax rates are already high in a global context (unlike VAT).
In this scenario, the additional spending allocations proposed in the original budget could largely prevail. However, without a VAT hike, sizeable reversals of the spending increases originally proposed might be required given the short time in which the budget had to be finalised. This short timeframe doesn’t rule out the possibility of removing other existing spending programmes, though this typically takes longer and, after several years of squeezing departments’ spending budgets (partly to accommodate wage bill overspending), this is likely increasingly difficult to do without compromising service delivery.
A (partial) reversal of the additional allocations to frontline personnel (to increase the number of teachers and nurses among others), of about R24bn per year, could narrow any shortfall (but would affect service delivery). This doesn’t have to be a permanent reversal, though; government could, for example, link the increased appointments to the savings from the proposed spending reviews. Without a VAT hike, at least some of the pro-poor elements in the initial budget may also be reeled in.
The bottom line is that the budget postponement will start a long-overdue in-depth assessment of the existing spending programmes and fiscal trade-offs.
• Moolman is head of South African macroeconomic research at Standard Bank Group
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