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Budget Preview: The second take on Budget 2025. Still scrambling for tax revenue.
- A revised Budget Statement is due to be tabled on Wednesday after the parties in the Government of National Unity (GNU) rejected the increase in the value-added tax rate to 17% from 15% in the original Budget, released on 19 February. We expect the budget deficit to remain wide over the Medium-Term Expenditure Framework period (MTEF, FY2025/26─2027/28) as revenue growth remains slow despite the mooted tax increase, while expenditure growth will remain sticky.
- Revenue: Over the first 10 months of FY2024/25, tax revenue growth was in line with the estimates in the original budget. Gross tax collections for fiscal year (FY) 2024/25 will slightly exceed the MTBPS estimate but remain below the 2024 Budget projection by almost R20 billion. The key proposed tax measure in FY2025/26 is the increase of the VAT rate, with media reports suggesting a compromise on a figure between 15.5% and 16%. The increase will boost aggregate revenue, albeit marginally, over the MTEF.
- Expenditure: The original figures raised annual total growth to an average of 5.8% over the MTEF, from 4.9% estimated in the MTBPS. Even though we assume slower expenditure growth, we acknowledge that risks are to the upside as expenditure needs continue to mount. The upcoming local government elections could prompt the GNU to introduce the Basic Income Grant in 2026, which would raise the social protection bill significantly. Debt service costs will rise further as total debt increases. The main challenge will be containing the public sector wage bill.
- Budget balance: Consequently, the consolidated budget deficit will remain above 4% over the MTEF, with the wider deficit containing the improvement in the primary surplus.
- Debt metrics: The public debt ratio will rise over the next two fiscal years before slowly starting to ease.