The government has misled South Africans for a decade

The National Treasury has been promising a peak in the debt-to-GDP ratio for a decade, but it has yet to happen. However, it assured South Africans that this is the year. 

Old Mutual Wealth chief investment strategist Izak Odendaal explained that the government’s debt burden is closer than ever to peaking due to the Treasury’s fiscal consolidation efforts. 

In a research note written after Finance Minister Enoch Godongwana’s third Budget Speech, Odendaal said it is vital that the government continue on its path of fiscal consolidation. 

In a nutshell, the third Budget for 2025 still represents broad policy continuity despite the various procedural disruptions. 

The country is still trying to rein in borrowing and stimulate economic growth. It is a difficult endeavour, and there are many risks ahead. 

The reversal of the Treasury’s planned VAT increase, which would have been implemented over the next two years, has made this task even more difficult. 

The reversal of this hike, combined with slower economic growth, will result in the government collecting R61.9 billion less in tax over the next three years compared to forecasts made in March. 

This will be papered over by an inflation-linked increase in the fuel levy and spending cuts, with the Treasury backing SARS to improve tax compliance to raise around R20 billion to avoid having to increase taxes in the 2026 fiscal year. 

Another sign of the government’s poor financial health is that it will spend R426.3 billion on servicing its debt in the current financial year. 

This translates into around R1.1 billion a day and 22 cents of every rand collected in tax by SARS. Without faster growth or declining interest rates on government debt, this could rise to 30 cents for every rand collected in the next three years. 

It is estimated that the local economy would have to grow at around 3% per annum for the government to stabilise its debt burden without introducing increased new tax measures or substantially cutting spending.

Never waste a good crisis

Odendaal explained that the positive aspect of this data is that it has created a sense of a crisis in the National Treasury, which is now working hard to tackle the problem. 

It usually takes a sense of crisis for politicians to make difficult decisions, usually because they can see trouble in the markets, the streets or at the voting booth.

In South Africa’s case, that sense of crisis occurred in recent years. The poor state of the economy has forced a profound shift in thinking, and the private sector is being allowed – and encouraged – to invest in infrastructure. 

The ballooning interest burden makes the cost of fiscal laxity very real. Every rand spent on interest could have been spent on health, education, or policing.

This crisis has forced the government to take action. It is undergoing fiscal consolidation to limit spending growth and thus, over time, stabilise and reduce the country’s debt burden. 

Importantly, Treasury will maintain a primary surplus in the coming financial year, meaning that tax revenue is projected to exceed non-interest spending. 

It will rise over the medium term from 0.7% of GDP 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 of running a primary surplus, the debt-to-GDP ratio is projected to peak in the current fiscal year at 77.4% and drift lower over time. 

Odendaal said a peak in the debt ratio has been promised for a decade and never happened, but we are closer than ever. 

From investors’ perspectives, fiscal consolidation remains the priority. The debt and deficit ratios are similar to those presented in March, though they are somewhat worse, mainly due to weaker expected nominal growth. 

Due to the abrupt change 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, 1.6% for 2026 and 1.8% for 2027. This is broadly in line with private sector estimates. 

Inflation is likely to be somewhat lower, reducing nominal growth, which tends to put downward pressure on tax collection.

While fiscal consolidation is a slow process, the evidence that this is happening will be positive for financial markets, supporting the rand and reducing borrowing costs. Over time, this will lead to improved credit ratings.