By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
Key highlights of the 2025 Budget are summarised below:
Finance Minister Enoch Godongwana has delivered his first budget under a multi-party Government of National Unity (GNU) amid global uncertainty and trade tensions. The budget prioritises fiscal consolidation while investing in infrastructure and supporting vulnerable households.
A politically negotiated VAT increase appears to have been agreed upon, replacing an earlier proposal for a two-percentage-point (ppt) rise in the postponed February budget. However, there are risks that this proposed VAT hike may not materialise, given diverging views among political parties and the parliamentary voting process, which still needs to take place to pass the budget in the coming weeks. No additional provisions have been made for state-owned enterprise (SOE) bailouts, signalling a shift towards governance reforms and a more efficient SOE guarantee framework. The fiscal framework remains anchored on four critical pillars, namely, maintaining macroeconomic stability, implementing structural reforms, building state capability, and supporting growth-enhancing public infrastructure investment.
Over the medium term, the fiscal strategy prioritises the following:
Risks to the fiscal outlook remain balanced, with the conclusion of wage negotiations with a multi-year agreement and early retirement initiative reducing compensation risks over the medium-term expenditure framework (MTEF) period. Risks over the medium term include lower economic growth, the poor financial condition of subnational governments and SOEs, and macro-fiscal shocks due to heightened geopolitical tensions.
Economic growth prospects are improving
Given time constraints related to the budget process, Treasury has not yet incorporated the latest 4Q24 GDP and current account data releases and, as such, its growth projections still reflect a downward revision to 0.8% from 1.1% for 2024. This is still marginally higher than the 0.6% implied by actual GDP outcomes. Nevertheless, Treasury's medium-term growth prospects remain cautiously optimistic, with GDP projected to rise to 1.9% in 2025, slightly above our 1.7% forecast, which accounts for the weaker starting point from the 4Q24 GDP release (Figure 1). Over the 2025-2027 calendar years, Treasury's growth projection averages 1.8%.
Headline inflation is expected to average 4.3% in 2025, lifting to 4.6% in 2026, as the VAT rate increase contributes to higher core inflation. In 2027, inflation is projected to moderate to 4.4%, supported by stable international oil prices, which are expected to keep fuel price inflation muted over the 2025-2027 period (Figure 1). However, increased protectionism and geopolitical tensions remain a key risk to this outlook.
Public Infrastructure Investment to Drive Growth
In 2025/26, a single structure overseen by Treasury will be established to coordinate state participation in project preparation and planning, PPPs, funding and credit guarantees
An additional R46.7 billion is provided in funding for infrastructure projects over the next three years. Public-sector infrastructure spending is projected to total R1.03 trillion over the MTEF period, with major allocations of R402 billion for road infrastructure, R219.2 billion for energy infrastructure, and R156.3 billion for water and sanitation infrastructure (Figure 2).
Fiscal strategy on track to stabilise debt
The government's strategy to stabilise debt, boost economic growth, improve governance, and support vulnerable households remains broadly on track. The debt-stabilising primary surplus remains a key anchor, projected to rise from 0.5% of GDP in 2024/25 to 0.9% of GDP in 2025/26, helping debt to peak and stabilise at 76.2%, slightly higher than the 75.5% envisaged in the 2024 MTBPS and 75.3% at the 2024 Budget (Figure 3).
A large primary surplus (revenue minus non-interest expenditure) is expected to keep debt contained over the rest of the decade; however, consultations are underway on potential longer-term fiscal anchors and a related document with relevant details has been released. Government is remaining prudent, maintaining R21.6 billion in contingency reserve over the medium term to cater for major unanticipated risks.
Tax policy: VAT rate rises to 16% from 15% to fund spending pressures
To address new and persistent spending pressures, the Treasury has made the difficult decision to increase the VAT rate by 0.5% to 15.5% in 2025/26 and another 0.5% to 16% in 2026/27. The last VAT rate increase, from 14% to 15%, occurred in 2018. This increase in the VAT rate is expected to yield an additional R13.5 billion in VAT revenue in 2025/26, lift to R29.8 billion in 2026/27 and R31.6 billion in 2027/28 once the VAT lifts to 16% from April 2026. Overall, as a result of this tax policy adjustment and other revenue increases largely in the form of personal income tax bracket creep, the government expects a net increase in tax revenue of R28 billion in 2025/26, R44.2 billion in 2026/27, and R46.8 billion in 2027/28 (Figure 4). Gross tax revenue is projected to rise from R2.00 trillion in 2025/26 to R2.31 trillion in 2027/28.
Before opting for a VAT hike, the government considered increasing personal and corporate income taxes but determined these would be more damaging to employment, savings, investment, and economic growth. Further, it was considered that South Africa's VAT rate is low relative to our peers (Figure 5) and that taking on additional debt to address spending pressures was not a feasible choice as the cost of borrowing would be unaffordable. VAT was then chosen as it is harder to avoid and has minimal behavioural distortions
Efforts to mitigate the impact of the VAT hike on low-income and vulnerable households
To offset the impact on low-income households, the list of VAT-zero-rated food items will expand to include certain meat cuts, dairy blends, and preserved vegetables. Above-inflation social grant increases and fuel levy relief will further mitigate the impact.
Spending increases to support growth and social wage
An additional R232.6 billion will be allocated over the 2025 MTEF period to address spending pressures, offset by reductions in provisional allocations and contingency reserves, leading to a net spending increase of R142.0 billion. Main spending additions include critical infrastructure investment, social protection and higher-than-anticipated public-sector wage agreement, as well as provisional allocations for critical frontline services (see Figure 6).
Public-sector wages will increase by 5.5% (1.0% in real terms) in 2025/26, with subsequent increases in line with projected inflation for the 2026/27-2027/28 period. This three-year wage agreement is estimated to cost the fiscus an additional R7.3 billion in 2025/26, R7.8 billion in 2026/27, and R8.2 billion in 2027/28, with a partial drawdown on the contingency reserve to address these costs. The Treasury views the agreement's extended duration, compared to previous shorter-term agreements, as a measure that reduces budget uncertainty. To manage wage costs, R11 billion has been allocated over the next two fiscal years to facilitate early retirements while attracting young professionals into the public sector. Approximately 30 000 government employees are expected to opt for early retirement. This is expected to yield a preliminary saving of R7.1 billion per annum over the medium-to-long term, which will be retained by departments and may use them to address existing compensation pressures and support capacity building.
Over the medium term, consolidated government spending is set to grow by an average of 5.6% annually, rising from R2.4 trillion in 2024/25 to R2.83 trillion in 2027/28. Economic development, driven by strong capital investment, is the fastest-growing expenditure category, expanding at 8.1% per year, mainly due to infrastructure allocations for transport and water projects.
Budget Review - Market implications
Against a backdrop of substantial economic risks - including fiscal weakness, external volatility, and pressing social needs, Finance Minister Enoch Godongwana delivered what was clearly a “compromise budget”. The budget presented was largely neutral for bonds and equities. During the speech, the rand hovered at weaker levels before strengthening, and bond yields came down sharply after rising earlier in the day. The equity market recovered after a sharp dip at the start of the speech from intra-day highs. In particular, the Financials 15 index along with the Small and Mid-cap indices (which are good proxies for SA Inc.) moved sharply down before recovering to end higher on the day
For bonds: A sustained commitment to debt consolidation will be welcomed by debt holders. A primary surplus is still expected this year and will increase from 0.5% this year to 0.9% of GDP in fiscal 2025/26. This will help debt peak and stabilise at 76.2% of GDP. However, this is at a slightly higher level than envisioned in the MTBPS and 2024 Budget - which may be negatively perceived by debt holders.
For equities: Optically, this was a negative budget for equities as higher taxes are generally regarded as negative from an economic growth perspective. Some of the measures put in place to protect lower income consumers and SMEs may limit this impact somewhat. Additionally, National Treasury remains notably serious about structural reforms and boosting economic growth, but this could take longer to materialise into a meaningful shift in the economic environment, consumer and business spending patterns, and a lift in corporate profitability.
Some of the more specific impacts on SA equities include:
While today's budget has been tabled, it has not been passed and it has not received full support from the GNU. For the budget to be passed there are parliamentary processes over the next few weeks that can allow parties to reach the agreement needed for the budget to become official. As a result, the uncertainty is not over, and much will happen over the next few weeks. This could impact the perception of stability in government and may induce volatility from a financial markets' perspective.
