Godongwana has a trick up his sleeve

Finance Minister Enoch Godongwana can include a line item in his 2025 Budget for improved tax collection to help cover the funding gap exposed by the reversal of the planned VAT hike. 

This strategy, last used in the early 2000s, would, if combined with other measures, enable Godongwana to avoid more severe cuts to government spending. 

However, the minister is still unlikely to completely make up the R75 billion funding gap that the planned VAT increase would have covered. 

This is feedback from Old Mutual chief economist Johann Els, who outlined what the insurer expects from the Budget trilogy finale on 21 May 2025. 

Els said the Budget will likely show a significant revenue shortfall of more than R75 billion following two failed attempts to increase VAT.

In addition, downward revisions to growth and inflation will likely result in further revenue loss, potentially increasing the financial gap that needs to be filled.  

The February National Budget failed to pass after it included a two-percentage-point VAT increase, which would have raised the rate from 15% to 17%. A March proposal to lift this tax to 16% over two years was reversed after a two-month battle. 

Without a VAT hike or major new taxes, Els said that the government will consider a combination of options to try to plug the gap. 

These include a potential petrol levy increase, which may generate some additional revenue. However, without other tax increases, this is unlikely to cover much of the R75 billion shortfall. 

This can be coupled with a strategy last used in the early 2000s: including a line item in the budget for improved tax collection. 

Els explained that this would put immense pressure on SARS to exceed the projected tax collection for the financial year, but it is realistic as the revenue service has outperformed expectations in recent years. 

This could be worth up to R5 billion, as South Africa is estimated to have a tax gap of around R800 billion. However, SARS is still recovering from the impact of state capture on the institution. 

Not enough money to cover tax shortfall

Els pointed out that neither of these will be enough to cover the full shortfall, and the combined impact of both would roughly equal R10 billion. 

Therefore, significant expenditure cuts will be required, totalling over R75 billion over three years. Given the added pressure from lower growth and inflation, the real gap may be even larger. 

“One practical approach could be to focus the budget only on this fiscal year for now. This would lower the immediate consolidation burden,” Els said. 

The October Medium-Term Budget Policy Statement could then be used to flesh out plans for the outer years, giving the Government of National Unity (GNU) more time to create consensus. 

National Treasury will likely revise gross domestic product growth forecasts downward from 1.9%, Els said. This may worsen the country’s projected debt-to-GDP ratio. 

Els’ projection for GDP growth is only 1.5% for the year, down from over 2%, largely due to the impact of the global trade slowdown on South Africa.

“However, there are upside risks such as cyclical tailwinds, lower inflation, reduced interest rates, rising confidence, and fewer structural constraints. These could all support stronger growth than currently forecast, especially as global trade tensions ease,” Els said.

Similarly, the inflation forecast for this year, which was 4.3%, is now expected to come in about one percentage point lower.

Els said lower GDP and inflation will adversely affect tax revenue. This brings the focus back to fiscal consolidation and whether the government can make the tough decisions needed to cut spending. 

It is crucial that National Treasury sticks to the deficit and debt targets outlined in the first two versions of the budget, both for its credibility and to ease the fears of investors. These targets include –

• A budget deficit target of 4.6% of GDP for this year, tapering down to 3.5% of GDP over the medium term.
• A primary surplus target of -0.9% of GDP this year, increasing to +2% over three years.
• The debt-to-GDP ratio peaking at 76.2% this year and stabilising thereafter.

“Markets and ratings agencies will react negatively if these targets are missed, especially if revenue shortfalls are covered through more borrowing,” Els said.

If National Treasury presents a credible budget that adheres to these targets, implements some expenditure cuts, and maintains reasonable growth expectations, then ratings agencies could begin upgrading outlooks.

This would have a significant positive impact on the country’s ability to borrow money at a lower cost and help attract money back into local assets.