The South African Minister of Finance, Enoch Godongwana, delivered the 2025 Budget Speech on March 12th, mapping out his strategy for economic recovery while maintaining fiscal discipline. It is clear from the Minister’s speech that difficult policy choices were made, including a phased VAT increase and a renewed commitment to structural reforms.
Economic Growth and Fiscal Consolidation
South Africa’s economy remains sluggish, with GDP growth of only 0.6% in 2024 and a projected medium-term average of 1.8%. Despite this, the government has committed to fiscal sustainability by adopting a primary budget surplus target to stabilize debt, a crucial step for long-term economic credibility. The debt-to-GDP ratio is now expected to peak at 76.2% in 2025/26, slightly higher than the 75.5% projected in the 2024 Medium-Term Budget Policy Statement (MTBPS).
VAT Increase: A Compromise for Stability
The initial VAT increase of 2% was rejected by the ANC’s GNU partners, resulting in the budget being tabled on March 12th instead of February 12th. The VAT hike has been reduced to a cumulative 1% over two years. It will increase by 0.5% in May 2025 (to 15.5%) and another 0.5% in April 2026 (to 16%). This measure is expected to generate R75 billion over the Medium-Term Expenditure Framework (MTEF), offsetting additional expenditure while maintaining investor confidence.
Other revenue measures include no inflationary adjustments to personal income tax brackets and medical tax credits, raising R60 billion. While these changes will help fund essential services, they also increase the tax burden on consumers. Moreover, while these two measures raise new revenues to fund additional spending, it is worth noting that the current fiscal year revenue is estimated to be lower by R16.7bn compared to the 2024 budget, mainly driven by 1) a decline in import VAT receipts, 2) lower fuel levies due to lower demand and large diesel refund payments, and 3) lower PIT due to lower compensation of employees in line with weak growth. Corporate income tax performed better than expected on the back of strong corporate profitability, however, it was insufficient to offset the decline from other tax revenue lines.
Spending Priorities and Economic Reforms
Total expenditure remains higher than projected in the 2024 MTBPS, with significant allocations for:
- Infrastructure: R1 trillion over three years, including R402 billion for transport, R219.2 billion for energy, and R156.3 billion for water and sanitation.
- Social Grants: The old-age and disability grants increase by R130 to R2,315, while the child support grant rises by R30 to R560. The Social Relief of Distress (SRD) grant is extended to March 2026, costing R35.2 billion.
- Public Sector Wages: An additional R23.4 billion is allocated to accommodate a wage agreement exceeding prior projections.
- Security and Defence: R5 billion is set aside for South African National Defence Force (SANDF) operations, including peacekeeping in the Democratic Republic of Congo.
- State-Owned Enterprises (SOEs): A R3.2 billion allocation supports the Gauteng Freeway Improvement Project, while Transnet and Eskom benefit from structural reforms and financial support.
Structural Reforms and Investment Strategy
The government remains committed to structural economic reforms through Operation Vulindlela, which has improved electricity supply, streamlined logistics, and enhanced digital communication. Key initiatives include:
- Public-Private Partnerships (PPPs): New PPP regulations from June 2025 aim to attract private investment in infrastructure projects.
- Energy Sector Reforms: A new Independent Transmission Programme will expand the electricity grid, enhancing energy security.
- Infrastructure Financing: A credit guarantee vehicle, launching in 2026, will de-risk projects and mobilize private-sector capital.
The 2025 Budget reflects a carefully balanced approach, with measured tax increases, and sustained infrastructure investment. While challenges remain, particularly in revenue collection and economic growth, the government’s continued commitment to fiscal consolidation and reform sends a positive message to investors. We remain optimistic of a positive trajectory for South Africa’s economic future.