South Africa’s National Budget Speech 2025

On Wednesday 12 March 2025, the Minister of Finance, Mr Enoch Godongwana presented his first National Budget Speech, post the formation of the new Government of National Unity (GNU).  The Budget Speech was delayed from 19 February 2025 following a reported increase in the VAT rate from 15% to 17% that the GNU could not support. The Minister’s speech comes at a time of a strained fiscal landscape: high unemployment, constrained revenue growth, mounting pressure from social grants and healthcare, coupled with struggling state-owned entities that ultimately results in escalating debt levels.

The International Monetary Fund (IMF) in its 2024 Article IV Consultation Report dated 30 January 2025 states that:

“South Africa’s economy has continued to face challenges in recent years. Power shortages and disruptions to rail and port operations constrained growth to 0.7 percent in 2023. Activity remained subdued in 2024, given election-related uncertainty in the first half of the year and severe droughts. Nonetheless, power generation was stabilized and, following the formation of a reform-oriented Government of National Unity in June, consumer, business, and investor confidence rebounded. Inflation moderated from 5.9 percent in 2023 to an estimated 4.5 percent in 2024, with the central bank cutting interest rates by 50 basis points in 2024. While still high, unemployment declined to an estimated 32.8 percent in 2024. Government deficits remained elevated, pushing public debt to above 75 percent of GDP by end-2024”.

The Budget Review notes that economic growth is expected to average 1.8% over the next three years and that the countries fiscal strategy remains on course. To boost growth and employment, government is significantly upscaling its infrastructure delivery programme. There are major opportunities to reduce the backlog in public infrastructure while creating jobs and boosting economic activity. The regulations for public-private partnerships are to be simplified to attract greater private-sector participation.

Increase in VAT rate

The VAT rate is proposed to be increased by 0.5% in each of the next two fiscal years. Government considers that the higher VAT rate will have the least detrimental effect on economic growth and employment over the medium term, relative to increases in personal or corporate income tax rates. The first 0.5% increase is proposed to take effect on 1 May 2025 and the second 0.5% to take effect on 1 April 2026. From 1 May 2025, zero rating may be extended to include edible offal of sheep, poultry, goats, swine and bovine animals; specific cuts such as heads, feet, bones and tongues; dairy liquid blend; and tinned or canned vegetables.

Other tax rates remain unchanged

The corporate income tax rate remains unchanged at 27%. Natural persons will bear the burden of the fiscal consolidation proposed in the Budget as no inflationary adjustments have been proposed to the personal income tax tables or rebates for the second consecutive year. No inflationary increases have been proposed for the medical tax credits either. The general fuel levy and Road Accident Fund levy remain unchanged.

Debt stabilisation

Over the medium term, the budget deficit is expected to narrow to 3.5% per cent of GDP. The debt-to-GDP ratio is expected to stabilise at 76.2% in 2025/26 and is anticipated to decline thereafter. Debt service costs currently consume 22c of every rand of tax revenue collected.

Tax revenues and government expenditures

The tax proposals included in the Budget Review are estimated to raise R28 billion in 2025/26 and R14.5 billion in 2026/27, adding significantly to tax collections over the medium term. The largest contribution over the medium term is from the proposed increase in the VAT rate, while personal income tax is increased in 2025/26 by not adjusting the tax brackets, rebates and medical tax credits for inflation. Gross tax revenue for 2024/25 is expected to be R1.85 trillion, which is R16.7 billion below the 2024 projection.

Consolidated government spending increases at an annual average of 5.6%, from R2.4 trillion in 2024/25 to R2.83 trillion in 2027/28. The social wage bill is expected to account for 61% of total non-interest spending over the next three years.

Conclusion

The IMF’s view on South Africa’s short-term economic outlook is as follows:

“The outlook remains marked by high uncertainty, with the balance of risks tilted to the downside. Key downside external risks relate to a further deepening of geoeconomic fragmentation and intensification of protectionist policies, an escalation of ongoing conflicts, a deeper slowdown in main trading partners, or slower global disinflation and tightening financial conditions. Domestically, resistance to and delays in the implementation of needed reforms could add to downside risks. On the upside, faster and more ambitious reform implementation by the new government, or stronger global growth, could boost confidence and growth”.

The Budget Review notes that government aims to improve the capability of the state with measures to strengthen education, health and defence; to continue rebuilding the South African Revenue Service; and incentivise early retirement to revitalise the public service. The government has committed to macroeconomic stability – which lays the foundation for sustainable growth – by restoring the health of the public finances.

Main tax proposals

The main budget proposals for the 2025/2026 fiscal year are as follows:

• An increase in taxes totalling R19.5 billion to alleviate immediate fiscal pressures is proposed with no inflationary adjustments to the personal income tax tables, rebates or medical tax credits.
• The VAT rate is proposed to increase from 15% to 15.5% from 1 May 2025 and to 16% on 1 April 2026.
• VAT zero-rating may be introduced on specific edible offal, specific meat cuts, unflavoured dairy liquid blends and specific canned vegetables to assist poor households.
• Excise duties on alcohol will increase by 6.75%, while duties on certain tobacco products will increase between 4.75% and 6.75%.
• No changes to the general fuel levy or the Road Accident Fund levy are proposed.
• From 1 April 2025 no ad valorem excise duty will be levied on smart phones with a value of less than R2 500 at the time of export to South Africa.