South Africa’s Third 2025 Budget A credible, market-friendly course correction amid constraints.21 May 2025

1. Budget Version 3.0:
Following two failed attempts, Finance Minister Enoch Godongwana has tabled a third - and likely final - Budget for 2025.

This version:

  • Abandons the VAT rate increase
  • Implements spending cuts across several areas
  • Maintains bond issuance levels and contains the gross debt trajectory in nominal terms
  • Paints a more realistic macro picture, with lower GDP growth and higher debt-to-GDP ratios

2. Fiscal Consolidation Remains the Anchor
Despite a tighter economic backdrop, the Budget reiterates commitment to fiscal consolidation:

  • Main budget deficit: -4.6% in 2025/26, narrowing to -3.2% by 2027/28
  • Primary surplus: +0.8% in 2025/26, rising to +2.1% by 2027/28
  • Debt-to-GDP: Now expected to peak at 77.4% in FY25/26 before a marginal decline. Nominal debt remains largely unchanged over the MTEF, but lower GDP forecasts lift the ratio.

3. Growth Forecasts Revised Down

  • Treasury’s forecasts: 1.4% in 2025, 1.6% in 2026, 1.8% in 2027
  • Private sector view: These are likely optimistic; my revised forecast for 2025 is 1.5%, given weak Q1 performance and global headwinds.

4. Revenue Measures: Tax Hikes Deferred, Collections Optimised

  • The VAT hike and zero-rating changes proposed in March were scrapped.
  • Instead, inflation-linked fuel levy hikes (R$.01and no PIT bracket adjustments.
  • Additional R20bn in new tax measures proposed for 2026/27 (details pending).
  • Excise duties on alcohol and tobacco will rise above inflation.
  • Revenue surprise: Shortfall vs Budget 2.0 is a manageable R62bn, while revenue is R75bn above MTBPS projections—largely due to stronger-than-expected nominal GDP and more optimistic tax collection assumptions.
  • SARS strengthening: Debt recovery potential of R20–R50bn/year; R4bn in new allocations to SARS to support this.

5. Spending Cuts and Reallocations

  • Total expenditure over the MTEF is now R6.69 trillion.
  • Additional spending lowered from R232.6bn to R180.1bn.
  • Cuts focused on: infrastructure (-R14bn), social grants (-R6.5bn), frontline services (-R30bn), early retirements (-R5.5bn).
  • Despite cuts, some capital and service delivery allocations remain, including Home Affairs and PRASA.
  • A contingency reserve of R21.6bn has been maintained.

6. Reform Momentum Picking Up

  • Treasury will redesign the budget process to close low-priority or underperforming programmes.
  • Spending reviews have identified R37.5bn in potential savings.
  • Payroll reform includes identifying ghost workers and other inefficiencies.
  • Updates on these reforms expected in the October 2025 MTBPS.

7. Debt Management Strategy Holds Firm

  • No change to auction levels or bond issuance plans.
  • Gross loan debt expected to rise from R5.69trn in 2024/25 to R6.82trn in 2027/28.
  • Debt-service costs lowered by R1.8bn vs March projections, but still very high at R1.3trn over the MTEF.
  • Borrowing needs fall in 2026/27 (to R434.3bn) before rising again in 2027/28.
  • Risk: Market participants still expect debt-to-GDP to reach 80% without faster growth.

8. Market Impact: Muted Positives Amid Lingering Risks

  • Reassuring for bond and equity markets due to policy stability, fiscal realism, and credible consolidation.
  • However, investors remain cautious:
    • Growth assumptions may be optimistic
    • Debt ratios are worsening in relative terms
    • Execution risks remain high
  • Nonetheless, this version is more market-friendly than the previous two budgets and sits at the optimistic end of market expectations.