Rising to the challenge: South Africa’s commitment to economic resilience

The Minister of Finance, Enoch Godongwana, delivered the highly anticipated National Budget Speech, following a postponement on 19 February 2025 due mainly to a proposed 2 percentage points value-added tax (VAT) hike. The budget effectively manages the tightrope of increasing public expenditure to spur growth while cautiously approaching debt accumulation. The strategic use of VAT increases as a less disruptive fiscal tool compared to raising corporate or income taxes is a judicious choice that merits further discussion among policymakers.

As part of the proposed fiscal measures, the government plans to increase the VAT rate by 0.5 percentage points in 2025/26, followed by another 0.5 percentage points in 2026/27, resulting in a 16% VAT rate by 2026/27. In an effort to alleviate the financial burden on lower-income households, the government proposes to introduce additional zero-rated VAT on essential food items, a greater than inflationary increase to the social grant and to maintain the current fuel levy without alteration. However, it would appear that the mitigations proposed may be insufficient to shield the poor and would be a short-term solution to increase revenue but may come at the cost of long-term growth.   The long-term implications of increased VAT on lower income households need more robust mitigation strategies than those indicated in the budget. It’s important to explore more comprehensive fiscal policies that directly target poverty alleviation and economic inequality, rather than relying primarily on indirect measures which may not fully offset the increased cost burden.

In addition, individual taxpayers were not totally spared from personal tax increases as for the second consecutive year, there will be no inflationary adjustments in the income tax brackets, rebates and medical tax credits adjustments for 2025/26.

The National Treasury projects a revised estimate of real GDP growth for 2024 of 0.8%. This is primarily attributed to a significant contraction within the agricultural sector. South Africa's economy is expected to grow at an average rate of 1.8% from 2025 to 2027. Government anticipates that economic recovery is likely to be supported by increased investor confidence, a reliable supply of electricity, lower interest rates, and a diminishing risk premium. Moreover, the effective implementation of essential reforms may play a significant role in facilitating higher growth rates.

These projected GDP growth rates seem modest against the backdrop of the extensive fiscal interventions, significant infrastructure investment (more than R1 trillion over the next three years), and structural reforms being proposed. There is a need for a more aggressive growth strategy that not only stabilises the economy but also propels it forward by delivering job growth and poverty reduction. The government could further enhance transparency in how these growth projections are calculated and more clearly define the linkages between the proposed fiscal measures and the expected economic outcomes.

Concerning fiscal sustainability and accountability, the budget deficit is anticipated to decrease from 5% of GDP this year due to subdued growth and reduced revenue, progressively declining to 3.2% of GDP by 2027/28. This budget deficit is primarily influenced by the capital financing requirement, highlighting a commitment to fiscal consolidation. Nevertheless, the ongoing deficit raises significant concerns regarding the vulnerability to revenue shortfalls and economic downturns, especially considering the optimistic economic outlook embedded within these projections.

Despite a new three-year wage agreement aimed at reducing uncertainty in budget planning, there remains a significant challenge in managing the public sector wage bill, which continues to consume a large portion of government expenditure. There is a critical need for a more sustainable approach to public sector remuneration and productivity that aligns with long-term fiscal plans, while ensuring that the government can attract and retain the skilled personnel necessary for effective service delivery.

Public debt is projected to stabilise at 76.2% of GDP in the fiscal year 2025/26, which is slightly above the level of 75.3% estimated in the 2024 budget. Thereafter, a gradual decline in gross loan debt is anticipated. The medium-term increase in this debt level will primarily be driven by the budget deficit and the financing associated with the Eskom debt-relief arrangement. Elevated debt levels and the associated debt-service costs pose significant challenges for the economy, as they limit the funding available for essential services. Debt-service costs are expected to reach their peak in the current fiscal year, stabilising at 21.7% of revenue, before declining in subsequent years. There is an urgent need to improve the sustainability of public finances by controlling debt levels while prioritising initiatives that directly promote productivity and economic growth. These initiatives include public-private partnerships, introducing e-visas for 34 countries and government expenditure reviews.

The simplification of public-private partnership regulations is good news as attracting private collaboration will be essential to solve some of the country’s largest challenges such as water, rail and electricity. Along with the Urban Development Financing Grant, these measures showcase a proactive strategy to address long-standing issues of municipal inefficiency. By incentivising municipal reforms and enabling private sector participation, the government is not only allocating funds but is also creating a strategic framework that encourages sustainable development and improved service delivery at the local level. This dual focus on financial performance and operational efficiency is crucial for turning around the performance of municipalities that are central to the daily lives of citizens.

The importance of the tax system in generating the revenue required to finance government programmes and provide critical services was emphasised. The 2025 budget outlines proposed tax policy measures expected to yield an additional R28 billion in tax revenue for the fiscal year 2025/26 and R14.5 billion for 2026/27. The supplementary revenue will be allocated to augment funding for vital public services, including education, healthcare, and commuter rail systems. It is projected that the tax-to-GDP ratio will attain 25.4% by the fiscal year 2027/28, bolstered by an enhanced economic outlook.

In a bid to broaden the tax base and improve administrative efficiencies, the South African Revenue Service (SARS) will be allocated R3.5 billion in this fiscal year, and an additional R4 billion over the medium-term. Mr Edward Kieswetter, the SARS Commissioner, confirmed that a significant portion of funding in this next year will be used to reduce uncollected debt due to SARS and reduce the number of outstanding tax returns. SARS will also use that money to invest in the modernisation of systems (e.g. using data science and artificial intelligence) for tax collection. It has been reported that an estimated R800 billion of unpaid taxes remains outstanding, which requires work and funding to enable SARS to collect. Bolstering SARS capabilities is a key area that could help solve the country's revenue crisis. The commitment to enhancing SARS’ capabilities, particularly through modernisation initiatives, sets a precedent for other African and global revenue services. It showcases a proactive approach to improving tax collection efficiency without overburdening the citizenry.

The public sector is anticipated to allocate R1.03 trillion towards infrastructure development over the next three years. Economic infrastructure, predominantly financed by state-owned enterprises, constitutes 81.5% of the medium-term financial forecast. This investment will primarily target the expansion of power generation capacity, upgrades and enhancements to the transportation network, as well as improvements in sanitation and water services. Furthermore, infrastructure dedicated to social services, encompassing healthcare and education, represents 15.5% of the overall expenditure. In relation to healthcare, infrastructure spend will include strengthening healthcare systems in preparation for the proposed National Health Insurance policy, such as creating centralised databases.

South Africa is currently in compliance or largely compliant with 37 out of the 40 recommendations set forth by the Financial Action Task Force (FATF), with one recommendation deemed inapplicable. The nation is classified as partially compliant with the two remaining recommendations, which concern non-profit organisations and cash couriers. It is essential to note that the achievement of these outstanding recommendations will not affect the timeline for the country’s removal from the FATF grey list. South Africa is favourably positioned for the mutual evaluation assessment anticipated in 2026/27. Additionally, further legislation is expected to be introduced in 2025 to bolster compliance with FATF recommendations.

Overall, South Africa is grappling with challenges that impact its economic landscape, including the effects of global trade dynamics, sluggish growth, persistently elevated unemployment rates, high debt-to-GDP ratios, and inadequate infrastructure. There is a sense of cautious optimism surrounding certain aspects of the minister’s fiscal strategy, such as supporting SARS’ collection efforts, which could represent a meaningful commitment to promoting sustainable economic development. To foster economic growth, it is essential for South Africa to implement a fiscal policy framework focused on sustainability. By prioritising immediate reforms and decisive actions, South Africa can pave the way for a brighter future that benefits all its citizens.