South African tax surprise

There is a substantial upside risk to government tax collections in the current financial year, with year-to-date receipts indicating meaningful revenue growth. 

This will help the government improve its financial position, with revenue increasing at a faster rate than spending, translating into an enhanced primary surplus. 

A primary surplus means the government has collected more tax revenue than it has spent, excluding debt-servicing costs. However, with these costs included, the state will still run a full budget deficit. 

A primary budget surplus is key as it slows down the growth rate of the government’s debt pile and should, over time, result in declining debt. 

Standard Bank chief economist Goolam Ballim outlined the government’s financial health during the Economy 2025 event, during which he revealed his macroeconomic projections for the coming year. 

Ballim explained that the government is in a far better financial position now than it has been for the past decade, having run consistent primary surpluses and kept spending growth in check. 

However, its debt burden is at risk of becoming unmanageable, with it crossing 75% of the total GDP. 

As the debt pile has risen, debt-servicing costs have skyrocketed and are now the fastest-growing expenditure item in the budget. 

The government, in the current financial year, is expected to spend over R1 billion on debt-servicing costs per day. 

This was not always the case, with the government managing to run budget surpluses in the early 2000s. 

Coupled with elevated economic growth, the government’s debt pile as a share of GDP declined, freeing up further capital to fund growth initiatives. 

However, since 2008, government spending has risen sharply without much to show for it in terms of economic growth. 

This resulted in the state’s debt pile as a share of GDP rising sharply, and credit rating agencies downgrading the country to below investment grade, also known as junk status. 

This relationship can be seen in the graph below. 

Ballim said 2025 could prove to be a turning point on this trajectory, as the National Treasury’s efforts to consolidate spending bear fruit. 

Moreover, the increased capacity of SARS has resulted in much-improved revenue collection despite lacklustre economic growth. 

However, this cannot last forever, with limited spending growth inhibiting economic activity and a small tax base being squeezed harder for more revenue. 

The only way South Africa’s financial challenges can be solved without difficult tradeoffs is through much faster economic growth.

Until then, the above combination of limited spending growth and increased collection capacity will have to do the trick. 

Crucially, this appears to be working, as for the urrent financial year, government spending has only grown around 4%, while tax revenue has increased by 5.3% – widening the primary budget surplus.

If this trend continues, Ballim said that it is entirely possible for South Africa’s credit rating to improve by two notches in the next three years. 

Rating agencies will begin by shifting their outlook for the country from neutral to positive in either May or November 2025, with the first upgrade in 2026. 

If the country’s credit rating improves, the interest it will pay on debt will come down, and foreign investment should flow into the country. 

However, this is highly dependent on improved economic growth and the National Treasury keeping a tight lid on spending, particularly with regard to public sector wages and a potential basic income grant.

The situation could be even worse than expected as unaccounted-for items continue to increase spending at a greater rate than expected. 

These include further support for state-owned enterprises (SOEs), with Transnet requiring funds more immediately than Eskom, but South Africa’s primary energy supplier might need another bailout if municipal debt keeps rising. 

Another major risk to the government’s fiscal consolidation plan is the continued above-inflation increases in public sector wages. 

While the government budgets for an increase, it often underestimates how much it ends up giving to state employees, resulting in deficits being revised higher and the debt burden growing further.