The local and global economic picture looks completely different now compared to February when Budget 2025 should have been finalised.
Economists agree that Budget 3.0 will be a tough balancing act for Finance Minister Enoch Godongwana as he tries for the third time on Wednesday to get Budget 2025 passed in parliament. Will it be third time lucky for Godongwana?
Godongwana’s first try on 19 February failed as the parties in the government of national unity (GNU) were not happy with his plans to hike VAT by 2% and it was postponed to 12 March at the 11th hour.
On 12 March Godongwana delivered his Budget 2025 and it was voted in after some political wrangling with a VAT increase of 0.5% for this year and another 0.5% for 2026, but Godongwana withdrew the Budget – again at the 11th hour. He will now try again on Wednesday.
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Hoping for pro-growth, pro-investment budget 3.0
Maarten Ackerman, chief economist at Citadel, notes that the fiscal outlook has deteriorated significantly since February, with growth expectations falling well below the 1.7% forecast earlier this year.
“This means lower tax revenue, wider deficits and growing debt to gross domestic product (GDP) concerns.”
He highlights the need for either bold pro-growth reforms or meaningful cost-cutting, especially the public wage bill. “We must see a budget that supports growth while containing borrowing. If not, long-term yields could climb higher and investor confidence may falter.
“A pro-growth, pro-investment budget could ease pressure over the medium term, but in the short term, everyone will be watching where the National Treasury decides to tighten spending.”
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Where will minister cut expenditure in Budget 3.0?
Frank Blackmore, lead economist at KPMG South Africa, says we know now that there will be no VAT increase. “That means that the calculated amount of revenue in budget 2.0 will now be lower because it will exclude that component.
“If the government will also not stick to its goal of fiscal consolidation, it will mean that there is no option to increase debt through borrowing to finance the expenditure at this point. Otherwise, that fiscal consolidation target will slip and they will have to cut expenditure.”
Blackmore says the important question is where they will cut expenditure. “If growth is important in terms of a target of the budget, as we heard in both previous versions of Budget 2025, we know it is vital for the future in terms of employment and GDP.
“They cannot cut infrastructure spending, because infrastructure is a base spend that underpins growth in the future and if the social wage is important and looking after people in general, then there cannot be cuts to public services themselves or grants either.
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Will there still be relief for lower-income consumers in Budget 3.0?
“Therefore, we look forward to hear where expenditure will take place and we know there are a lot of opinions out there, such as the size and costs of the state.
“There is some room for changes to be made, because as we heard in Budget 2.0, there were some proposals to lessen the impact of the VAT hike proposed in that budget to help lower-income people, such as low fuel levies and tax increases, more zero-rated items and only partially adjusted personal income tax brackets.”
He says the question is whether, without the VAT hike, these will still take place? “I think we will see an increase in fuel prices. We might see fewer zero-rated items as far as that is concerned and we will probably see no adjustments to tax brackets, which is a stealthy way to increase personal income tax revenue to help government collect enough revenue to cover the expenditure after it is cut.”
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Will GDP expectation be cut in Budget 3.0?
Roy Havemann, senior economist at the Bureau for Economic Research (BER) and head of the BER’s Impumelelo Economic Growth Lab, says the BER estimates nominal GDP growth at 5.5%, while the National Treasury’s March estimate was 7% for the 2025/2026 fiscal year.
“Our calculations therefore predict that the Treasury faces a revenue shortfall of R29.2 billion compared to Budget 2.0. On the spending side, we estimate that savings of approximately R10 billion can be achieved, leaving fiscal slippage of around R19 billion.”
He says the legal challenge to the VAT Act raises serious process issues as it makes it difficult for the Treasury to take major revenue measures on Budget Day. “Over time, these will have to be shifted to the Medium Term Budget Policy Statement (MTBPS).
“While this will be disruptive in the short term, in the longer term this will bring about better forward planning as tax increases will have to be negotiated and implemented ahead of time.”
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Expectation that budget deficit will remain wide in Budget 3.0
Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, say their unit forecasts the budget deficit to remain wide as the Treasury has limited room to reduce expenditure.
“Key spending increases for 2025/26 include the 5.5% wage settlement with the public sector unions, while the social protection allocations increased at an annual average of 5.3% between 2025/26 and 2027/28.
“The increases in these spending functions are virtually irreversible, with the reduction of social grants likely to invoke another political storm. A wider budget deficit will increase public debt and debt service costs in subsequent years, adding to the aggregate expenditure bill.”
They do not expect any significant tax changes on the revenue side, as the political backlash against the VAT increase suggests that any tax hike would be similarly rejected. They say medical aid tax credits will possibly be reduced, particularly for higher income earners. The fuel levy has not changed since April 2022 and could also be increased.
However, Matshego and Nkonki point out that these adjustments will not significantly compensate for the R75 billion tax revenue forgone due to the rejection of the VAT rate increase.
“As a result, we expect the budget deficit to remain wide at 4.8% in 2025/26, at 4.5% in 2026/27 and at 3.9% in 2027/28. The debt-to-GDP ratio will peak at 79.3% in 2026/27, but remain high, marginally easing to 78.7% in 2027/28. Encouragingly, the primary budget (before debt service costs) surplus will likely widen to 1.4% in 2026/27.”
