As South Africa braces for a pivotal moment in its fiscal policy landscape, Minister of Finance, Enoch Godongwana is scheduled to present the revised 2025 Budget on 12 March 2025. This presentation comes amidst growing concerns over the nation’s economic trajectory and the implications of increased government spending.The anticipated speech is set to navigate significant terrain, addressing the implications of net new spending, potential tax increases designed to fund this spending, and their possible repercussions for economic growth.
The framework laid out by the minister will significantly influence assessments of fiscal policy and its overarching impact on South Africa’s economic performance.Catalysed by the rejection of the previously proposed February 2025 Budget, which included an unexpected 2 percentage point rise in VAT, the stakes are high. This increase, viewed as a fiscal necessity to finance a R173 billion rise in non-interest spending, is now subject to intense scrutiny. The National Treasury had estimated that the VAT change could generate approximately R191 billion over three years.
However, given the debt levels – standing at 76% of GDP with debt servicing costs consuming a staggering 21.1% of gross tax revenues – concerns have mounted regarding the sustainability of this approach.The objective of stabilising debt while ensuring a primary budget surplus throughout the Medium-Term Expenditure Framework (MTEF) remains vital. An increase in spending without a corresponding uptick in revenue risk jeopardising the primary budget surplus target of 0.5% of GDP (around R34 billion) for the fiscal year 2024/25. Moreover, the anticipated multiplier effect suggests that the newly proposed spending may not yield sufficient economic stimulus, reigniting fears of prolonged economic stagnation.
As the treasury predicts a modest GDP growth adjustment to 1.9% – slightly improved from earlier estimates – the economic outlook nonetheless reflects a downward revision, with even greater caution applied. Usage of this budget to address pressing social needs, rather than merely a means of economic revitalisation, will be essential in shaping public perception and reaction to the proposed fiscal measures.
Focus Areas of New Spending
The revised budget’s increased current spending allocations cover multiple areas, including:
- Enhanced Compensation and Hiring: Focus on improving pay and workforce strength in critical departments.
- Other Spending Initiatives: Support for various programmes such as employment initiatives, road maintenance, military deployments, and local elections.
- Infrastructure Investment: Key funding for agencies like Prasa and various infrastructural projects.
The intricate balance of addressing fiscal health while fostering growth hinges significantly on the upcoming decisions surrounding the proposed VAT increase, which has become intertwined with discussions on implementing permanent social grants. This initiative was rolled out amid the COVID-19 pandemic and poses critical challenges; particularly regarding cohesive governance amidst a fragmented social support system.
Potential Paths to Revenue Generation
Tax increase proposals are likely to emerge, particularly given the reluctance to introduce the full VAT increase. Instead, a composite tax approach may be favoured, incorporating elements of bracket creep and possible adjustments to levies across various sectors. Critics argue that any delay in comprehensive reforms, such as enhancing tax collection capacity, could further exacerbate existing fiscal pressures.
The recent push for spending reviews and efficiency improvements amidst historical bailouts of state-owned enterprises reflects a growing recognition of the need for transformative budgeting practices. These include a concerted effort toward reviewing the social grant system in conjunction with skill development funding, indicating that although challenges remain, there is a pathway for reform.
