The National Budget in a time of uncertainty

Arthur Kamp, Chief Economist at Sanlam Investments

The National Treasury’s 2025 Budget is expected to project a fiscal path largely in keeping with the 2024 Medium Term Budget Policy Statement (MTBPS), although there may be a need to adjust following developments locally and globally. For instance, the Treasury may need to additional spending on the wage bill – although this impact may be mitigated by managing headcount or through savings elsewhere. Similarly, spending on health may receive consideration, if aid from the United States aid is permanently withdrawn.

Additionally, although the Treasury appears to be on track to meet its revised revenue target for the current fiscal year, supported by strong growth in personal income tax, nominal GDP increased by just 4.1% in the year up until the third quarter of 2024. Accordingly, growth is now tracking significantly lower than the Treasury’s projected average increase in nominal GDP of 6.5% from 2025/26 to 2027/28.

Despite this, we expect the budget balances projected in Budget 2025 to track the MTBPS numbers reasonably closely in 2025/26, with the all-important main Budget primary surplus improving to 0.7% of GDP (compared with the Treasury’s forecast of 0.9% of GDP) from 0.4% of GDP in 2024/25.

At the same time, there are no material new revenue-raising measures expected, for now – although adjustments to customs duties, the health promotion levy, excise duties and import duties are candidates for increases.

If additional revenue is indeed required in the new fiscal year, one option for the Treasury is to not adjust personal income tax brackets and rebates, as well as medical tax credits, for inflation, which was the route chosen by the Treasury in 2024/25. In February last year, it projected an additional R18.2bn from this source. In addition to the taxable withdrawals of the “Two Pot” Retirement System, this goes a long way towards explaining the buoyancy of personal income tax in the current fiscal year.

And, even if one assumes full adjustment for inflation from 2025/26 onwards, the decision not to compensate for bracket creep in 2024/25 has an ongoing impact on taxpayers. The Treasury estimated last year this would amount to an additional R19.3 billion in 2025/26 and R20.7 billion in 2026/27. Does this imply less likelihood of a repeat in the year ahead?

Longer term expectations and global impact

Looking beyond the near term, the Treasury is expected to show further improvements in the primary budget surplus and, ultimately, a decrease in the government debt ratio over the medium term. Specifically, the MTBPS shows the debt ratio peaking at 75.5% of GDP in 2025/26 and decreasing to 75.0% of GDP in 2027/28.

However, in the end, the actual debt trajectory may be materially different from its projected path. After all, there are many moving parts which influence the outcome; including changes in the trend of GDP growth and tax buoyancy, new expenditure priorities, changes in required transfers to state owned companies and the revaluation of inflation linked bonds and foreign currency bonds.

The challenge for the Treasury is that it is required to plan in an increasingly uncertain environment where trade wars may have a materially adverse impact on our GDP growth, tax buoyancy and ultimately revenue collection. US President Donald Trump may be using the tariff threat as a bargaining instrument in the pursuit of different goals and actual tariff increases may be far lower than currently mooted. Even so, we are progressing along a path of increasing global protectionism, which can be expected to worsen the trade – off between global growth and inflation. South Africa’s small, open economy is not immune to these developments.

Considerations for South Africans

Closer to home, the uncertainty relates to whether the Treasury can stick to its published medium term expenditure framework. Historically, sustained South African primary budget-surpluses driven by expenditure restraint, are rare. An exception is the fiscal consolidation under Minister Trevor Manuel, which not only included expenditure restraint but was also aided by strong revenue growth as economic reforms boosted GDP growth.

Simultaneously, the persistently high unemployment rate and legislative changes, including the introduction of the NHI Act, imply risk to the expenditure outlook. Real GDP growth must increase for a sustained period to reduce the unemployment rate. In the interim, a safety net is required.

Other influencing factors

In addition, a recent court ruling (currently on appeal) suggests there may need to be a material increase in the number of recipients of the social relief of distress grant (SRDG) with less stringent criteria applied. Attention is also being drawn to the amount of the grant itself. Increasing the number of recipients implies higher spending, of more than R30 billion per year, if implemented in future years. Neither of these spending risks are expected to influence the Treasury’s near-term expenditure projections, but the medium to long-term risk lingers.

Predicting the future is fraught with risk but considering this background, risks are tilted to a continued increase in the government’s debt ratio over the medium term, although the debt trajectory should remain relatively flat. If this risk is realised, we cannot rule out the possibility of new revenue-raising measures being introduced at some point. In that case, these should be focused on indirect taxes, rather than direct taxes on income, which discourage saving and investment. And while the possibility of a wealth tax cannot be excluded, we should bear in mind that wealth is accumulated savings, of which there is a dearth in South Africa.

In an uncertain environment, market participants would seek confirmation of the Treasury’s commitment to the pursuit of a sustainable fiscal policy in Budget 2025. To this end, the Treasury has been considering the merits of introducing some form of fiscal anchor, for example a cap on spending and/or a debt rule. However, an announcement on this is not expected in Budget 2025. In the interim, the Treasury’s intent to stabilise the debt ratio is reflected in its commitment to improving the primary budget surplus to a level consistent with debt consolidation.

Ultimately, though, faced with a highly uncertain environment, the only viable response is to double down on the government’s economic reform agenda to lift economic growth. The question is how South Africa’s large infrastructure needs will be funded. In the absence of fixing infrastructure, economic growth cannot be lifted to the level required to return fiscal policy to a sustainable position while funding socio-economically critical spending.

The Treasury’s stated intention to show government borrowing for infrastructure spending, funded through the Budget, as a separate borrowing category, is a welcome development. Far better to borrow to buy assets, and lift the long-term potential GDP growth rate, than to borrow for consumption. Further, borrowing would include (but is not limited to) concessional borrowing from international financial institutions – a nod to the high cost of borrowing the government faces at present.

Moreover, according to the 2024 MTBPS, the Budget Facility for Infrastructure is to become a “centralised gateway” for all large infrastructure projects, with decisions on financing separated from the Budget process so that the most appropriate funding mechanisms are employed. This would include Public Private Partnerships (PPPs) and government guarantees to help de-risk projects.

That said, we don’t have enough domestic savings to fund all South Africa’s investment needs. Foreign savings are required to make up the difference. Hence, the consideration of funding from international financial institutions. In the end, though, the idea should be to reform the economy to lift the potential returns from investing here to encourage broad-based, sustained capital inflows, including from the private sector.

At the same time, we need to continue showing a credible path to a sustainable fiscal position, so that our sovereign debt ratings improve over time and the risk premium priced into South African bonds decreases to reduce borrowing costs.

Disclaimer: Sanlam Investments consists of authorised financial services providers in terms of FAIS and disclaimers can be viewed on www.sanlaminvestments.com