South Africa at breaking point

If South Africa’s economy does not grow significantly in the coming years, close to 30% of all tax revenue will go to servicing the government’s debt. 

Currently, 22 cents of every rand collected by SARS from individual taxpayers, VAT, companies, and other sources goes towards paying interest on the government’s debt. 

This has begun to crowd out spending in other key areas of the economy and will impact South Africa’s significant social wage. 

Finance Minister Enoch Godongwana revealed in his Budget Speech on 21 May 2025 that debt-servicing costs will reach R426.3 billion in the coming financial year.

This is more than the government is expected to spend on economic development, community development, or peace and security.

This translates into over R1 billion a day, and its growth is expected to continue. Interest on the government’s debt is the fastest-growing expenditure item in the Budget. 

The head of fixed interest at Coronation, Nishan Maharaj, explained that rising costs are the root of South Africa’s financial deterioration.

Maharaj also said that the turmoil surrounding the Budget shows the very difficult task that the country faces, given its excessive debt load.

Crucially, the latest Budget does not point to increased debt issuance to fund new expenditure projects and maintains a primary budget surplus. 

However, Maharaj said that new expenditures on increasing social grant payments and further funding for front-line workers are recurring and fixed. 

This means that any drop in economic growth and revenue will create a larger funding shortfall, reducing fiscal buffers and raising the debt burden. 

In addition, the National Treasury accounts for its debt servicing costs on a cash basis versus traditional accrual accounting methods. 

This implies that it sets up its debt accumulation forecasts for disappointment, that is, it accumulates more debt than it forecasts.

Thus, if economic growth does not recover significantly, outcomes are generally expected to be worse than forecast in the 2025 Budget. 

Around 22 cents of every R1 collected in tax will continue to go towards servicing the government’s debt. 

Maharaj warned that this number will reach close to 30% in the next three years if funding costs do not come down or tax revenue does not grow significantly. The graph below shows this. 

National Treasury’s plan

The National Treasury finds itself in a difficult position regarding how to tackle this problem. It has little direct ability to grow the economy without a shift in government policy. 

Maharaj said that South Africa’s poor economic growth is the main reason the country is in such a difficult financial position. 

In essence, South Africa’s economic stagnation has manifested itself as a financial crisis, with the growth in government debt far outpacing economic growth. 

Coronation’s calculations show that the country will have to grow its economy at around 3% per annum to stabilise its debt. 

However, this is very unlikely, and as a result the National Treasury has turned to limiting expenditure growth through fiscal consolidation.

As part of this plan, the Treasury aims to keep a lid on spending growth to ensure it runs a primary Budget surplus. 

This means that the tax revenue collected by the government is sufficient to cover its spending obligations, excluding debt-servicing costs. 

In effect, this will prevent the government’s debt pile from growing further and, over time, enable it to pay down its debt. 

Godongwana and his team at the Treasury managed to maintain a forecasted primary budget surplus for the coming fiscal year despite the reversal of the planned VAT hike and a weak economic outlook. 

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.

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 supports 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.