What South Africa’s new 2025 Budget could look like

The National Treasury will soon need to table a new 2025 Budget, the third so far, which will likely slash government spending and cut the social grant hike announced in Budget 2.0.

The Bureau for Economic Research’s Roy Havemann said the National Treasury having to propose a third budget is not unexpected.

This follows the National Treasury’s press statement on Thursday, 24 April, announcing the withdrawal of its proposed half-percentage-point increase in the value-added tax (VAT) rate in the 2025/26 fiscal year.

This hike was proposed in Budget 2.0, which the National Treasury tabled after some GNU parties refused to sign off on its first Budget, which proposed a two percentage point VAT hike.

While Budget 2.0 was passed in Parliament, with ActionSA playing a large role, there has been significant political and public pressure on the National Treasury and the ANC surrounding the proposed VAT hike.

This came to a head on Wednesday, 23 April, when the DA took the VAT matter to court.

The GNU’s second-largest party argued in the Western Cape High Court that the VAT rate can only be increased after Parliament decides, not through a decision only by the Finance Minister.

A day after the DA made this argument in court, the National Treasury released a statement explaining that Finance Minister Enoch Godongwana has withdrawn the proposed 0.5 percentage point VAT increase.

Havemann explained that the minister’s decision to withdraw the VAT hike proposal was based on two issues, both related to the DA’s court case.

Firstly, his powers to raise VAT by announcement relied on section 7(4) of the VAT Act, and the ongoing court case regarding the constitutionality of this section has not been going well. 

“Even if the court found in favour of the National Treasury, it would immediately go on appeal to the Constitutional Court, which would have taken weeks and take it past the 1 May implementation date,” he explained. 

He said a loss in the Constitutional Court for the minister could mean that VAT would have to be repaid. 

The second problem was that, even if he had won the case, the increase would still need to be voted through in the National Assembly. 

Despite voting in favour of the fiscal framework, Action SA indicated they would not support the VAT increase in the National Assembly. 

Havemann warned that this would leave a very small margin, and to get a majority, the full support of all ANC MPs and almost all the small parties would be required.

What happens now

Havemann explained that a third budget was a likely consequence of the Finance Minister tabling a budget without GNU backing.

The minister has now withdrawn Budget 2.0, which, in practice, means he has withdrawn the Appropriation Bill and the Division of Revenue Bill.

“These two Bills, together with the Revenue Laws Amendment Bill, make up the ‘Budget’. Withdrawing these Bills is equivalent to withdrawing the Budget,” he said.

Havemann said the Treasury will now effectively table a new Budget, with Parliament set to give a date. 

He said this does not pose risks other than potential reputational damage, as the Public Finance Management Act allows spending to continue at the same rate as in the previous year.

In addition, constitutionally, interest payments on debt are ringfenced outside of the Budget and continue to be paid indefinitely. “There is absolutely no ‘shutdown’ scenario, at least until MTBPS,” he reassured.

This will give the minister some time to propose expenditure adjustments to cover the revenue shortfall resulting from the VAT hike withdrawal. 

The Finance Minister is expected to introduce a revised version of the Appropriation Bill and Division of Revenue Bill within the next few weeks.

Havemann explained that the exact legal status of the fiscal framework is unclear, but the National Treasury’s press statement provided some insights.

The statement read, “The decision not to increase VAT means that the measures to cushion lower income households against the potential negative impact of the rate increase now need to be withdrawn and other expenditure decisions revisited.” 

“To offset the unavoidable expenditure adjustments, any additional revenue collected by SARS may be considered for this purpose going forward.”

Havemann said this implies that the above inflation increase in social grants will be reduced, potentially to inflation only, and now at the much lower expected inflation rate. 

“We expect the lack of drag relief on personal income tax to remain,” he said.

In its statement, the National Treasury also warned that Parliament will be requested to adjust its expenditure to ensure “that the loss of revenue does not harm South Africa’s fiscal sustainability”.