BUDGET 2025: DEBT DYNAMICS
AND DISAGREEMENT

Budget 2025 did not stray too far from its original version, which was not tabled due to opposition to a proposed increase in the value-added tax (VAT) rate from 15% to 17%. In the revised version, the VAT increase was scaled back to an increase from 15% to 16% to be introduced over two years.

At the time of writing, the Finance Minister’s revised budget is still being rejected by other parties in the government of national unity (GNU). The DA, in particular, insists that any tax increases should be temporary and accompanied by reforms to curb wasteful expenditure.

BUDGET HIGHLIGHTS

Treasury is aiming to tap the market for more funding than initially proposed. The gross borrowing requirement is now projected at R581.96 billion in 2025/26 compared with the initial un-tabled proposal of R564.4 billion. Even so, this is below the 2024 Medium-Term Budget Policy Statement (MTBPS) projection and includes less domestic long-term loan issuance.

Confronted with increased expenditure demands, modest economic growth and a high debt servicing burden (resulting from a persistent increase in the debt burden), Treasury has illustrated its commitment to returning South Africa’s fiscal position to sustainability by showing smaller government budget deficits and a decrease in the gross loan debt level over the next three fiscal years.

Importantly, the Main Budget primary balance surplus is projected to improve to 2.0% of gross domestic product (GDP) by 2027/28 from 0.5% of GDP in 2024/25 – a necessary intervention to stabilise the debt ratio with debt servicing cost amounting to 21.6% of Main Budget revenue in 2025/26.

Although the near-term peak debt ratio in 2025/26 has been increased to 76.2% of GDP (from the 75.5% projected in the 2024 MTBPS), it is expected to edge lower to 75.1% of GDP by 2027/28 (compared to 75.0% of GDP previously) given the improvement in the primary balance. Thereafter, the debt ratio is projected to decrease to 67.1% of GDP by 2032/33.

Treasury’s gross borrowing requirement for 2025/26 is R581.96 billion, which is lower than the requirement of R602.7 billion projected in the 2024 MTBPS. The difference mainly reflects the decrease in Eskom debt relief to R80.2 billion in 2025/26 (R30 billion lower than the 2024 Budget estimate). Issuance of domestic long-term loans decreases to R343.2 billion from the R400.7 billion projected in the MTBPS.

Years of excessive consumption expenditure have kept Budget deficits large and the debt ratio on an upward path. Accordingly, Treasury is apportioning an increasing share of available resources to government capital expenditure, which is beginning to lift relative to government consumption. Complementing this, there has been a significant decrease in government wages relative to total spending over the past decade.

INFRASTRUCTURE SPEND

Legislation has been enacted to allow for private sector participation in infrastructure spending, including the provision of basic service needs, with an emphasis on easing the regulatory burden and de-risking projects.

In addition, government support for state-owned companies (SOCs) has increasingly been linked with meeting predetermined conditions (bearing in mind that SOCs are responsible for close to 40% of the more than R1 trillion in infrastructure spending planned for the medium term), while support for municipalities is intended to become more performance-based.

At the same time, Treasury notes it is introducing new models to fund infrastructure expenditure. These models are at different stages of development and include the infrastructure funding platform, a credit guarantee vehicle and private sector funding for transmission infrastructure. The purpose is to generate a stream of bankable projects to crowd in private sector funding.

If the infrastructure spending plans are implemented, real GDP growth should lift to at least 2% over the medium term.

ADDITIONAL ALLOCATIONS

In the interim, however, given socio-economic spending pressures, Treasury has had to find additional funding for an increase of R142 billion in Main Budget non-interest expenditure over the medium term relative to the 2024 Budget, including an additional R46.7 billion for infrastructure (partially negated by a drawdown on the provisional allocation of R24.6 billion from the Infrastructure Fund).

The public service wage agreement costs R23 billion over the next three years, while early retirement-related costs amount to a further R11 billion. There is, however, more certainty now for the outlook for wages, which is the largest expenditure component.

An additional allocation for the social relief of distress grant amounts to R35.2 billion and above-inflation increases for social grants amount to a cumulative R8.2 billion over the medium term. The latter reflects a downward adjustment relative to the previous un-tabled budget.

In addition, further allocations for frontline services add up to R70.6 billion over three years, but provincial allocations elsewhere are decreased by R66.7 billion.

Tax collection associated with savings withdrawals linked to the introduction of the two-pot retirement reform netted R11.6 billion by the end of February 2025, significantly more than the R5 billion for 2024/25 projected by Treasury in the MTBPS.

Still, in deciding to contain borrowing, Treasury needed to turn to additional tax measures to fund the additional spending.

TAX INCREASES

National Treasury proposes tax increases to raise additional revenue, while the projection for gross tax revenue is revised up by a cumulative R137.8 billion over the next three years relative to the 2024 MTBPS. This includes an increase in the VAT rate from 15% to 16% over two years, specifically by 0.5 percentage points in 2025/26, taking effect on 1 May 2025 (which increases revenue by R13.5 billion and R14.3 billion in 2025/26 and 2026/27 respectively) and by 0.5 percentage points in 2026/27, taking effect on 1 April 2026 (which increases revenue by R15.5 billion in 2026/27).

VAT zero-rating of essential food items to protect the poor ‘costs’ the fiscus R2.0 billion and R2.1 billion in 2025/26 and 2026/27 respectively. Treasury also notes that most VAT is paid by the top four expenditure deciles – households that spend R118 000 or more per year – while the poor are also supported by expenditure on the social wage, which amounts to 61% of total non-interest consolidated spending.

Although the general fuel levy remains unchanged, costing the fiscus R4.0 billion in 2025/26, excise duties on alcohol and tobacco products are increased by more than inflation (which nets an additional R1 billion in 2025/26).

Moreover, there is no relief for personal income taxpayers from bracket creep as Treasury has opted not to adjust the individual tax brackets, rebates and medical tax credits for inflation. The latter raises an additional R19.5 billion in 2025/26.

DEBT TRAJECTORY

To date, our base case has consistently shown an increase in the government’s gross loan debt ratio over the medium term, albeit a relatively flat trajectory, since we incorporate additional expenditure risks. Treasury’s forecast for the debt ratio in 2025/26 is now in line with our projection. However, the medium-term outlook for the debt trajectory is still at risk.

In the end, the actual debt trajectory may be materially different from its projected path. Many moving parts influence the outcome, including changes in the trend of GDP growth and tax buoyancy, new expenditure priorities, changes in required transfers to state-owned companies and the revaluation of inflation-linked bonds and foreign currency bonds.

Indeed, on expenditure, a recent court ruling (currently on appeal) suggests there may need to be a material increase in the number of recipients of the social relief of distress grant, with less stringent criteria applied. Attention is also being drawn to the amount of the grant itself. Increasing the number of recipients implies higher spending of more than R30 billion per year, if implemented in future years.

Neither of these spending risks are expected to influence Treasury’s near-term expenditure projections, but the medium-to-long-term risk lingers. Simultaneously, legislative changes already enacted, including the introduction of the NHI Act, imply risk to the expenditure outlook.

The bottom line is that until growth lifts, spending demands for an increased safety net will remain high, while the fiscal math can’t add up if growth surprises on the downside relative to the current projected economic upswing.

WHAT HAPPENS NOW?

The Finance Minister finds himself in an unprecedented situation of his tabled Budget still being opposed. Without an agreement with the DA, securing its passage will be challenging. The ANC holds 159 of the 400 parliamentary seats, while the DA has 87. This implies that, although possible, it will be difficult to pass the Budget in its current form without DA support.

The Budget will now move to parliamentary committees, following which a report on the fiscal framework and revenue proposals will be presented to the National Assembly and Council of Provinces. This report must either accept or amend the proposed framework.

Parliament must adopt any amendments by resolution within 16 days of the Budget’s tabling – by 2 April 2025. Reaching a compromise between the relevant parties is a matter of great importance.