The South African Minister of Finance, Enoch Godongwana, presented the third iteration of his fourth National Budget on Wednesday, 21 May 2025. This followed the withdrawal of the second attempt amid ongoing disagreement within the Government of National Unity (GNU) cabinet on the amended proposed increase of the VAT rate by one percentage point over two years.

While the bulk of the Budget has not changed, these are some of the key differences between this Budget and the March iteration:

Changes to the macroeconomic outlook

• The Minister significantly reduced SA’s GDP growth for 2025 from 1.9% in the March Budget Review to only 1.4%. The growth rates for 2026 and 2027 have also been marginally reduced to 1.6% (from 1.7%) and 1.8% (from 1.9%) respectively.
• According to National Treasury, the revision is because of weaker-than-expected growth in 2024; ongoing logistical constraints; heightened political uncertainty; higher borrowing costs; and global headwinds. The downward revision has affected key ratios including debt-to-GDP and the government’s tax revenue projections.
• The risks to the growth outlook are tilted to the downside, so there could be further downward revisions to GDP by October, when growth could be forecast to be as low as 1.1% in 2025.

Changes to tax revenue proposals

• As expected, the Minister has removed the proposed VAT increase tabled in March. Consequently, additional tax policy measures were introduced to compensate for the R75 billion lost in potential tax revenue over the medium term. To replace a portion of the lost revenue from the withdrawal of VAT increases, the Minister:
  1. Withdrew the expansion of the zero-rated items, effectively saving National Treasury R4 billion in tax revenue over the medium term.
  2. Proposed an inflation-linked increase in the general fuel levy for petrol and diesel, for the first time in three years, to R4.01c/l and R3.85c/l respectively, effective 4 June 2025. This translates to R3.5 billion in additional tax revenue collection from the fuel levy.
  3. Will propose an additional R20 billion in tax measures to be included in the 2026/2027 fiscal framework. More detail on how the amount will be raised will be provided in the 2026 Budget.
• In addition to the R3.5 billion that National Treasury allocated to the South African Revenue Service (SARS) for operational and capital expenditure for system modernisation, the Minister has allocated SARS additional R4 billion to support debt collection and revenue-raising exercises. Importantly, however, the potential additional revenue from SARS’s debt collection efforts and efficiency gains has not been added to the revenue estimates. If it is successful, the National Treasury will reconsider the R20 billion in tax increases to be proposed next year.
• National Treasury has revised up tax revenue collection for 2024/2025 by R8.9 billion compared to the March 2025 Budget Review. This means that, in 2024/2025, tax revenue underperformed the 2024 Budget by only R7.8 billion rather than R16.7 billion, translating into a total revenue increase of 6.6% year-on-year. The better performance was driven by a once-off dividends tax receipt and lower-than-expected VAT refunds.
• Positively, the tax proposals still translate into upbeat revenue expectations over the medium term, although this is a notable downward revision from the March 2025 Budget. Collections are expected to increase to R1.99 trillion in 2025/2026, R2.14 trillion in 2026/2027, and R2.29 trillion in 2027/2028 . These are a combined R61.9 billion below the projections presented in the March 2025 National Budget.
• Total tax revenue is expected to increase by 7% in 2025/2026 (as opposed to 8.7% proposed in the March 2025 Budget). Gross tax revenue growth is projected to average 7.2% for the three years to 2027/2028 This appears largely achievable, given that it implies a tax buoyancy of 1.15, which is in line with the long-term average.

Adjustments to spending plans

• Given the lower revenue projections, the Minister has had to make some adjustments to spending plans. Proposed additional spending has been reduced by R52.5 billion over the medium term, with a reduction of R15.1 billion in 2025/2026. This reduction is achieved mainly through adjustments to provisional allocations to education, health, defence, correctional services, and home affairs, which are reduced by R29.43 billion over the medium term.
• In addition, spending on social grants is decreased by R6.6 billion over the medium term, which represents the removal of social grant spending designed to mitigate the impact of the previously-proposed VAT increase.
• Importantly, spending on infrastructure investment decreased by R12.95 billion over the medium term, with a reduction of R6.15 billion in 2025/2026 This is driven by the decision to remove the allocation to support the recovery of the Passenger Rail Agency of South Africa (PRASA), amid a reduction in its spending plans; and disaster management allocations.
• Other notable reductions include allocations to early retirement costs. National Treasury now only expects 15 000 people to take up the early retirement offer, not the 30 000 it expected at the time of the March 2025 Budget Review.
• Overall, government intends to reduce consolidated spending by R13.6 billion in 2025/2026 compared to the March 2025 Budget, with reductions coming from social protection (R4.05 billion); economic affairs – transport (R3.97 billion); education (R3.11 billion); and health (R2.58 billion).
• Unfortunately, debt-servicing costs remain one of the fastest-growing areas of government spending. In fact, this is projected to be R1.48 billion higher in 2025/2026 than the March 2025 Budget projections. The increase comes as government debt-to-GDP is projected to peak at a higher rate (see below). This means it is projected to make up 16.6% of total expenditure in 2025/2026, up from 11.1% as recently as 2019/2020. As a percentage of total revenue, interest costs are expected to be 22%, with government spending of R1.35 trillion on servicing debt over the three-year period.

Changes to key fiscal ratios

• For the 2025/2026 fiscal year, the Minister announced that the budget balance is projected to deteriorate further: it will be -4.8% of GDP, worse than the -4.6% of GDP at the time of the March 2025 Budget. Positively, however, the fiscal deficit is expected to improve over the medium term, dropping to -3.4% of GDP by 2027/2028 (compared to an expectation of -3.5% of GDP in March 2025).
• Interestingly, the Minister highlighted that the primary balance is expected to be in surplus in the current fiscal year (the primary balance is calculated as the budget deficit less interest costs) at 0.8% of GDP (slightly lower than the 0.9% projected in the March 2025 Budget); and then it will grow for the foreseeable future.
• Despite this, government debt-to-GDP is expected to peak at a higher rate than projected in the March 2025 Budget. While government debt is still expected to peak in 2025/2026, it is projected to be higher at 77.4% of GDP than the peak of 76.2% projected in March 2025. Unfortunately, the level of government debt is projected to remain above 76% of GDP for the next three years, before moderating to around 75.9% of GDP in 2028. The notable increase in this ratio is due to lower nominal GDP, which has been lowered by R466 billion over the medium term, driven by both lower real GDP and lower expected inflation.

Conclusion

Despite the additional delays in presenting the 2025 Budget, the Minister of Finance showed maturity in the willingness and ability to adjust the Budget based on feedback from GNU partners. The third version of the 2025 Budget finally acknowledges the high tax burden faced by South Africans (as shown by the steep increase in the tax-to-GDP ratio), recognising that any further increases in tax would add to the strain many households and businesses are currently experiencing. Instead, the Minister chose to control expenditure over the medium term and continue the path of fiscal consolidation by not increasing borrowing outright to make up for the tax revenue shortfall.

Despite these efforts, fiscal concerns remain. Firstly, the projected increase in tax collection over the next three years might be difficult to achieve, given that economic growth is not projected to rise above 2%. Secondly, there are various expenditure pressures, as pointed out by the Minister, that could come up as the year progresses that would place additional strain on the fiscus. Thirdly, the rise in debt service costs, if left unattended, could severely undermine government efforts to retain fiscal stability. Finally, this Budget still failed to allocate spending effectively enough to meaningfully lift economic growth. Given this, fiscal slippage is likely to continue, making it harder for National Treasury to get debt under control.

STANLIB Economics Team‍