The minister says he redistributed the money in Budget 3.0 – rather than cutting expenditure – to make up for not increasing VAT.
Finance Minister Enoch Godongwana at last delivered the third version of Budget 2025, calling Budget 3.0 a redistributive budget and saying it is not an austerity budget as expected, since he had to find money to plug the R75 billion hole left after the VAT increase was scrapped.
He did not explain how he ever thought that the VAT increases would be acceptable to all the parties in the government of national unity (GNU), but said it was unsurprising that it created so much debate.
“A national budget is not merely an accounting exercise measuring what we earn, what we spend and what we borrow as a nation. It is a reflection of the difficult trade-offs needed to balance fiscal sustainability while addressing our developmental goals,” he said.
“There is clarity now: VAT will remain at 15%. This decision reflects our commitment to listen to South Africans and to all the political parties represented in this house. Today’s budget has taken these views into account.”
ALSO READ: Godongwana cuts government spending to offset VAT shortfall
The result of scrapping the VAT increase
Godongwana pointed out that the decision to do away with the VAT increase without a viable alternative source of revenue significantly reduced National Treasury’s ability to fund additional government programmes and projects.
He said the budget directs 61 cents of every rand of consolidated, non-interest expenditure towards the social wage that will be spent to fund free basic services like electricity, water, education, healthcare and affordable housing, as well as social grants.
Budget 3.0 invests over R1 trillion in critical infrastructure to lift economic growth prospects and improve access to basic services without compromising the fiscal strategy of sustainable public finances.
Godongwana said Treasury achieved this difficult balance by reducing additional spending over the medium term by R68 billion, primarily reductions aimed at provisional allocations not yet assigned to votes. This means baseline allocations across all spheres of government remain largely unchanged.
Instead, Treasury reduced the size of the proposed increases to allocations in line with what the country can afford, he said. “Our focus going forward is threefold: balancing the budget through spending efficiencies, strengthening revenue collection and giving expression to the Medium-Term Development Plan.”
ALSO READ: Budget 3.0: First fuel levy increase in three years – Here’s by how much
Budget 3.0 also cuts economic growth expectations
The minister also pointed out that much has changed since his previous budget attempt in March. “The most troubling changes are the global economic developments which have, in the short space of two months, already significantly affected the domestic economic outlook.
“The global economy is facing heightened trade tensions and elevated policy uncertainty with worrying economic consequences. The International Monetary Fund now projects global growth at 2.8% in 2025, 0.5 percentage points lower than the January estimate. Similarly, global trade is projected at 1.7% in 2025, which is also much lower than the January estimate.
“At the same time, inflation expectations are now above central bank targets in many advanced and emerging market economies and new trade barriers may raise inflation and prolong the cycle of higher interest rates.”
Godongwana said as a small, open economy, South Africa is dependent on global trade and financial inflows which exposes South Africa particularly to these global economic developments. Therefore, Treasury now estimates real gross domestic product (GDP) to grow at 1.4% in 2025, lower than the 1.9% projected in March.
“Over the next two years, we project real GDP growth to increase moderately, to 1.6% in 2026 and 1.8% in 2027. Looking further ahead, the risks to the outlook remain elevated. These include the worsening global outlook, weaker-than-expected growth in the fourth quarter of 2024, the persistence of logistics constraints and higher borrowing costs.”
ALSO READ: Budget 3.0: pressure and expectations are building
SA needs faster, inclusive economic growth – minister
Gogongwana emphasised that faster, inclusive growth that creates jobs is the only path towards a more prosperous South Africa.
Treasury’s strategy for faster growth and to shield the country from the worst effects of an increasingly uncertain global environment, remains anchored on four pillars, he said. These pillars are maintaining macroeconomic stability, implementing structural reforms, improving state capability and accelerating infrastructure investment.
“Maintaining macroeconomic stability promotes low and stable inflation and lower interest rates while enhancing the country’s ability to withstand external shocks. In turn, this creates a conducive environment for investment, savings and job creation.”
“Prudent fiscal policy is a key component of maintaining macroeconomic stability that stabilises debt as a percentage of GDP, achieves a primary surplus, expands infrastructure investment and supports the social wage.”
ALSO READ: Budget 3.0: Alcohol and cigarette prices will increase — here’s by how much
The sad story of government debt
However, the minister did not have god news about government debt. He said in 2025/26, government debt is projected to stabilise at 77.4% of GDP. “While this is 1.2% higher than projected in the March budget, it is mainly due to lower nominal GDP.
“The main budget deficit decreases by R8 billion over the medium-term expenditure framework (MTEF) compared to our estimates in March. This narrower deficit is enabled by the steadily expanding primary surplus.
“By 2027/28, the primary surplus will grow from an estimated 0.8% of GDP in this financial year to 2.1%. A growing primary surplus means that our revenue will continue to be larger than our non-interest expenditure over the next three years.
“This contributes to lowering our gross borrowing requirements, resulting in lower debt and lower debt service costs over time. However, debt service costs remain high, amounting to more than R1.3 trillion over the next three years.”
Put differently, he said, this means in 2025/26 alone we are spending around R1.2 billion per day to service our debt which is more than what we spend on frontline services such as health, the police and basic education.
“This fiscal strategy is how we will drive down the debt to GDP ratio, slow the growth in debt service costs and rebuild our fiscal buffers. In this way we will shield ourselves from an increasingly uncertain and unpredictable external environment.”
