South African households will feel the effects of the 2025 Budget, whether in at the grocery store till, through stagnant salaries, or creeping tax burdens. To fund an additional R102 billion in government spending for the 2025/26 financial year, National Treasury has opted for a R28 billion tax increase, largely through a value-added tax (VAT) hike that will reach 16% by 2027, and no inflation-linked relief for income tax brackets.  

To soften the blow to households, there are no adjustments to the fuel levy and some items, consumed by low-income households, will be added to the zero-rated basket. In addition, non-Social Relief of Distress (SRD) grants haven been increased to account for inflation. Increases in excise duties – extra taxes on goods such as alcohol, cigarettes and sugary drinks – are also included in the tax proposals. These combined proposed tax changes mean less disposable income for households, while the increase in VAT will hit consumers directly through higher prices for goods and services and indirectly via higher interest rates.

Relative to the 2024 Medium Term Budget Policy Statement (MTBPS) forecasts, economic growth is expected to be slightly higher at 1.9% for 2025. However, forecasts for the 2026 and 2027 remain unchanged to the 2024 MTBPS at 1.7% and 1.9% respectively.

Rising debt and pressing fiscal trade-offs 

With spending pressures rising and economic growth falling short of expectations, government debt has been revised upward from 75.5% to 76.2% of the gross domestic product (GDP) for the 2025/26 financial year. Despite this, Treasury maintains its plan to reduce the main budget deficit from 4.7% in 2024/25 to 3.3% by 2027/28, largely in line with the 2024 MTBPS. This adjustment hinges on strengthening the primary surplus, which excludes interest payments on debt.

Unless the economy grows beyond the expected 1.8% average over the medium-term, the expected narrowing of the main budget deficit over the medium term to 3.3% remains vulnerable as it hinges on the wage agreement being intact over the medium-term; no funding for state owned entities such as Transnet; while the funding of the income support that will replace the SRD grant remains a question mark. 

The financial implications of including about 11 million more recipients in the SRD grant, as per the January 2025 court ruling, is also not accounted for in the budget. There is also the issue of filling the funding gap by the US President's Emergency Plan for AIDS Relief (PEPFAR), which was not mentioned in the budget speech. 

Infrastructure spending growth

Spending priorities outlined in the MTBPS – infrastructure investment and social spending and managing the wage bill – remain. Infrastructure spending is expected to grow at 8.1% over the medium-term, the fastest growing spending item. The R1 trillion allocations to infrastructure spending over the medium term is in line with the R940 billion infrastructure spending mentioned by President Cyril Ramaphosa during the State of the Nation Address (SONA). 

The SRD grants have been extended until end March 2026. The 2024 mid-term budget indicated that the 2025 budget would provide clarity on the reforms of the grant system. However, this is still under review with the report expected in September 2025. 

As expected, the South African National Defence Force (SANDF) has been allocated additional resources for the Southern African Development Community (SADC) peace keeping mission in the Democratic Republic of the Congo (DRC). 

Debt-service costs crowd out spending

Debt-service costs, which consume 22% of government revenue, are now the second-largest spending item, limiting funds available for other critical needs. A three-year wage agreement has been reached, with part of the cost covered by a drawdown from contingency reserves to reduce borrowing. However, using contingency reserves to fund expenses like public sector wages is not only unproductive but also leaves the fiscus more exposed to external economic shocks.

Positives from the budget include less funding for the Eskom debt relief of R20 billion, than initially planned in the Eskom Debt Relief Act 7 of 2023. This will reduce the government’s gross borrowing requirement in the 2025/26 financial year. If financial conditions continue to improve at Eskom, the allocation of R10 billion in the 2028/29 financial year could also fall off, adding some relief to the fiscus. 

Progress has also been made on some of the targets from Operation Vulindlela such as energy supply projects, reduction of internet cost by 50% for the 1.5GB data bundle and improved visa processes, amongst others. Operation Vulindlela is a joint initiative of the Presidency and National Treasury to accelerate the implementation of structural reforms and support economic recovery. It is aimed at modernising and transforming network industries, including electricity, water, transport and digital communications.

As indicated in the budget, much still needs to be done to improve the efficiency of the rail and port operations. Benefits of investment initiatives will only be felt few years down the line while implementation and efficient spending remain a problem. 

Economic constraints and political uncertainty 

It is unclear of how the economy will grow in the short term or how the budget supports the ambitious plan in the SONA of growing the economy by 3%, as growth is projected to only grow at an average of 1.8% over the next three years. The budget speech was also mute on the youth unemployment crisis, which stood at 44.5% in the last quarter of 2024. However, the budget review does indicate that discussions on labour market reforms to support small businesses and boost youth unemployment, are currently underway.

There is no doubt that the government’s tax policy options for the three main tax instruments are limited. Economic growth, improving spending and tax collection efficiency and structural reforms are key to ensuring social, macroeconomic and fiscal stability. 

Whether or not the budget tabled by Finance Minister Enoch Godongwana will be passed remains to be seen, as some political parties in the Government of National Unity have indicated that they will not be voting for it.  

   Dr Tumisang Loate-Ntsoko is a senior lecturer in the Department of Economics at the University of Pretoria