South Africa teetering on a cliff

South Africa’s debt burden is becoming increasingly unstable, and the government’s latest efforts to address this through its 2025 Budget fell short of the radical reform the economy needs.

Nedgroup Investments’ Head of Multi-Management, Trevor Garvin, said the 2025 Budget presented on 12 March outlined several key measures aimed at stabilising the economy and addressing immediate fiscal challenges.

However, he said it fell short of the bold reforms needed to propel South Africa towards sustainable long-term growth. 

“It appeared to be more like a budget of continued economic stagnation,” he said.

Garvin explained that supply-side constraints, rather than demand-side failures, have largely led to a sluggish economy. 

South Africa’s economy grew by a meagre 0.6% in 2024, with experts’ growth expectations set at around 1.6% for 2025, which is still far below the Government of National Unity’s 3% target.

He highlighted several local factors that have all resulted in both local and foreign investors demanding a higher risk premium.

This includes a failing logistics network, collapsing electrical supply and load-shedding, an education system not producing the appropriate skills, and a labour market demanding high wages.

“This has resulted in a material reduction of new investment spending by the private sector,” he said.

“Over the past decade, we have had a government with significant internal political instability and continual changes in policy making.”

“Regulatory uncertainty, cadre deployment into failing state-owned enterprises and a complicated foreign policy have understandably made it much more difficult for large foreign businesses to invest into South Africa, thus further stifling economic growth.”

Garvin said this year’s Budget projects that debt-service costs will rise at an annual average rate of 7.1% over the Medium-Term Expenditure Framework (MTEF).

This will put additional pressure on the already strained fiscal resources. 

“At this point, around 22 cents of every R1 collected in taxes is spent on debt interest payments, materially crowding out investment spend in other vital areas like infrastructure, education, and the healthcare system.”

Optimistic projections

He highlighted one of the most striking aspects of the Budget as the projected real GDP growth of 1.9% for 2025, with expectations of 1.7% and 1.9% for 2026 and 2027, respectively. 

“These figures, while optimistic, raise questions about their feasibility given the current economic climate,” he said. 

“Over the past decade, South Africa’s economy has stagnated, with GDP growth averaging well below 2% per year.” 

“The Budget’s current optimistic projections near the top end of this 2% figure hinge on the successful implementation of structural reforms and the ability to attract investment, both of which have been elusive in recent years.”

 While he said the Budget’s emphasis on fiscal consolidation and structural reforms is commendable, the measures outlined seem more like incremental adjustments rather than transformative changes. 

For example, the decision to freeze the fuel levy provides much-needed relief to motorists, but it also highlighted the government’s reluctance to implement more aggressive revenue-generating measures. 

In addition, the most controversial aspect of the 2025 Budget, an increase in the value-added tax (VAT) rate to 15.5% in May 2025 and 16% in April 2026 may not even be sufficient to bridge the revenue gap.

Garvin also highlighted the public wage bill as one of the most contentious issues of this year’s Budget, as public servant wages continue to exert significant pressure on the budget. 

“Despite efforts to contain it, the wage bill remains high, driven by above-inflation wage settlements,” he said.

“This raises concerns about the government’s ability to manage its finances effectively and allocate resources to more productive areas.” 

“The high wage bill also underscores the need for comprehensive public sector reforms to enhance efficiency and accountability.”

On a cliff

The 2025 Budget also allocated a substantial R284.7 billion for social grants.

While Garvin said this reflects the government’s commitment to supporting vulnerable households, there are reasonable questions about the sustainability of such high levels of social spending. 

“Can the country afford these payments in the long run, especially given the rising debt levels and the need for fiscal consolidation?” he asked.

“The public debt ratio is expected to peak at 76.2% in 2025/26, a level that poses significant risks to fiscal stability and one that the International Monetary Fund and several global rating agencies have stated is not sustainable.” 

“The country is teetering on the cliff.”

Despite this, Garvin said the government’s approach to economic growth and job creation, which would benefit the economy and citizens immensely, is lacking.

The Budget outlined several pro-growth infrastructure and social spending allocations, with R46.7 billion added to infrastructure plans over the medium term. 

“However, the impact of these measures on unemployment remains uncertain,” he said. 

“The Budget did not provide a clear roadmap for addressing the structural issues that hinder job creation, such as the rigid labour market and the skills mismatch.” 

“The success of these initiatives will depend on the government’s ability to effectively manage and implement these infrastructure projects, a task that has proven challenging in the past.” 

“It is easy to come up with ideas, but the actual efficient execution of these plans has been slow and poor to date.”

Overall, Garvin said that while the 2025 budget contained several positive measures, it fell short of the bold reforms needed to address South Africa’s deep-seated economic challenges. 

“The government’s cautious approach, while understandable, may not be sufficient to achieve the ambitious growth targets and fiscal consolidation goals outlined in the Budget.” 

“The country needs a more comprehensive and transformative strategy to unlock its full economic potential and ensure sustainable long-term growth.”

“Only then can South Africa hope to achieve the desired economic growth and improve the living standards of its citizens.”