Godongwana’s big win

Finance Minister Enoch Godongwana has managed to maintain a forecasted primary budget surplus for the coming financial year despite the reversal of the planned VAT hike and a weak economic outlook.

This is vital for the government’s plan to rectify its deteriorating financial health by limiting the growth of its debt load and eventually being able to pay down some of its debt. 

Old Mutual Wealth’s chief investment strategist, Izak Odendaal, explained that this is key for investors as it shows that the government remains committed to fiscal consolidation. 

Odendaal said that compared to the fireworks of the first two proposed Budgets, the third version was decidedly uneventful, which, in this context, is good. 

Godongwana said the reversal of the VAT hike and a weaker economic outlook would result in the government collecting R61.9 billion less in tax revenue over the next three years compared to the March Budget’s forecast. 

This gap would be covered by an inflation-linked increase in the General Fuel Levy, spending cuts, and more efficient tax collection from SARS. 

However, he warned that if the Revenue Service fails to collect additional revenue, the government must consider further tax increases in the coming financial years. 

Odendaal explained that this is effectively kicking the can down the road, but it also gives the Government of National Unity (GNU) more time to discuss fiscal policy to avoid a repeat of this year’s events. 

From the investors’ point of view, fiscal consolidation remains the priority, with debt and deficit ratios similar to those presented in March. 

These metrics are somewhat worse, partly due to weaker expected nominal growth due to changes in US trade policies. Global growth is expected to be lower, and the domestic real economic growth outlook has been cut to 1.4% for 2025. 

This is broadly in line with private sector estimates. Inflation is likely to be somewhat lower, reducing nominal growth. Weaker nominal growth tends to put downward pressure on tax collection.

The final Budget remained committed to stabilising the debt-to-GDP ratio in the current year, as did versions 2.0 and 1.0, and kept bond issuance unchanged.

This consistency is supportive of the local bond market, the rand, and locally exposed companies, even if it was largely anticipated.

Crucially, the government will maintain a primary surplus, meaning that tax revenue is projected to exceed non-interest spending. It is expected to rise over the medium term from 0.7% to 2.1% in 2027/28. 

The main budget deficit, which includes interest payments, is expected to continue narrowing over the medium term, reaching 3.2% of GDP by 2027/28. 

As a result, the debt-to-GDP ratio is expected to peak in the current fiscal year at 77.4% and drift lower over time.

Government’s unsustainable debt burden

Odendaal explained that fiscal consolidation is not easy and will require difficult decisions to be made for the next few years to limit spending growth. 

However, it is the only option left for South Africa due to its lacklustre economic growth, which limits growth in tax revenue. 

South Africa is in an extremely perilous financial situation, with the interest rate the government pays on its debt being higher than nominal GDP growth. 

This means the country is headed to a point where the economy cannot support the government’s debt burden, resulting in it falling off a fiscal cliff. 

Debt is projected to stabilise at 77.4% of GDP in 2025/26, somewhat higher than the 76% projected in the March Budget. 

This is largely due to a lower denominator, as nominal economic growth will be slower, partly due to lower expected inflation.

Because of the high interest rate the government pays, debt-service costs are substantial. Interest payments will consume 22 cents of every rand SARS collects. 

This is also expected to peak and decline over time, and as this debt-service burden gradually falls, more money will be available for other important areas.

Odendaal explained that this is highly dependent on the government continuing on its fiscal consolidation path and the National Treasury maintaining or improving its credibility to drive down borrowing costs. 

There will be no VAT increase this year, as expected. However, unspecified tax hikes are pencilled in from next year to raise around R20 billion per year. 

Without revenues from a VAT hike, some of the additional spending proposed in the first two attempted Budgets will be rolled back. 

Nonetheless, there is still a R180 billion increase to the baseline over the medium term, compared to R233 billion in Budget 2.0. 

This will support frontline delivery and infrastructure spending. The Treasury plans to spend R1 trillion on infrastructure over the medium term.

The Treasury noted that spending reviews have identified “tens of billions” of savings that will be applied to future budgets and could possibly mitigate the need for tax measures in 2026.