South Africa tables a budget everyone can live with
The third iteration of SA’s national budget was tabled on 21 May and is expected to be passed by parliament without opposition. The final version excludes a VAT increase, foregoing R70bn in tax revenue over the budget period (2025/26 to 2027/28) but retains an effective R50bn increase in personal income tax (PIT) though bracket creep – i.e. no adjustment was made to tax brackets to account for inflation. GDP growth has been revised lower, negatively affecting all fiscal metrics and reducing expected tax revenue by R40bn, which is partly offset by a hike in the fuel levy, which sees South Africans paying 16c/l more for petrol and 15c/l more for diesel, to raise R13bn in additional revenue.
The budget has also penciled in what it refers to as “additional policy measures” to be announced in the 2026 budget, which are expected to raise around R20bn per year in 2026/27 and 2027/28. While details about this additional tax revenue were not provided, the South African Revenue Service (SARS) has concurrently stated that enhancements to its tax collection capabilities will enable it to raise an additional R20bn per annum. To this end, SARS has received an additional R7.5bn in funding.
Despite these measures, total projected tax revenue has been revised downward relative to the March budget by R20.5bn in 2025/26, R22bn in 2026/27 and R20.0bn in 2027/28. To maintain fiscal balance in the face of a cumulative R62bn lower revenue, government expenditure has been trimmed by R67bn.
Consolidation is difficult without political will
To its credit, National Treasury’s stated objective remains stabilising debt-to-GDP. This is not an easy feat in a persistently low-growth environment, constrained by the socio-economic and political challenges of high unemployment. To compensate for the revenue effect of low growth, tax hikes have been introduced. However, reducing growth in spending is not simple. In the face of rising unemployment, it is difficult to limit the scope of social development programs and social grants, and resizing the wage bill has also proved difficult, due to political dynamics. The treasury has had to revise expenditure projections progressively higher each year (Figure 1), resulting in wider budget deficits and debt levels.
Figure 1: Spending is revised upwards and Eskom bailouts have crowded out other priorities
Source: National Treasury, Matrix
Rising debt levels and a higher sovereign risk premium have seen interest become the second largest component of spending (currently at 18%), averaging 12% growth per annum over the past five years. Growth in the social wage, which is 56% of spending, has averaged 6.0% per annum. Together these components account for 74% of total spending. Cash injections to Eskom worth R220bn over three years (2023-2025) account for an additional 4% per annum of total spending (Figure 1). These three line items are somewhat inflexible, and National Treasury has consequently had to disproportionally adjust the remaining 22% of the expenditure budget lower.
South Africa has become increasingly reliant on the social wage, which includes social grants. In 2020, social grants included the newly introduced COVID grant which increased the number of grants dispersed by 9.0 million, from 17.8million to 26.8 million, at an additional cost of R36bn per annum (13.3%). According to National Treasury, there are currently 27.7 million recipients, around half of South Africa’s population. Surprisingly, we note that COVID grant recipients fell from 9 million to 8.3 million in 2024/25. National Treasury is appealing a recent court ruling which declared the COVID grant permanent, while the state is arguing that it is temporary. If the court ruling stands, the number of COVID grants could increase to 18.3 million, according to the Institute of Economic Justice (IEJ), at a cost of R77bn per annum.
Figure 2: A breakdown of South Africa’s social grants, R billion (2024/25)
In the face of these constraints, it is possibly commendable that spending (including Eskom) has only grown 5.5% on average over the past five years against budgeted growth of closer to 4.0% on average (Budget 2022).
Quantifying fiscal slippage
To assess progress made by the National Treasury (NT) with respect to fiscal consolidation, we compare the May 2025 budget against the February 2024 budget. The comparison shows slippage in every metric.
The 2024/25 budget deficit has been adjusted wider, to 4.5% of GDP, missing its February 2024 target of 4.3% (Figure 4). While the deficit itself was only R15bn over budget, the denominator was R45bn under budget, as GDP growth, which was forecast at 5.7%, is now estimated to be a more subdued 4.4% (Figure 5).
The May 2025 budget projections for 2025/26 and 20216/27 have seen revenue broadly unchanged compared to February 2024 (due to increased tax measures), however spending projections have risen by R84bn (Figure 3), such that the deficit is now budgeted to widen to 4.6% of GDP, as opposed to narrow to 3.9% of GDP (figure 4). Risks are high, in our opinion, that the deficit will be even wider because nominal GDP growth projections for 2025/26 and 2026/27 of 6.2% and 6.5% should be revised lower to 5.3% and 5.8% (figure 5).
Figure 3: Difference in revenue and spending between budget 24 and budget 25 (R bn)
Source: National Treasury, Matrix
Figure 4: Difference in the budget deficit between budget 24 and budget 25 (R bn)
Source: National Treasury, Matrix
Figure 5: GDP growth is unlikely to recover from nominal 4.4% in 2024/25 to 6.3% in 2025/26
Source: National Treasury, Matrix
Debt-to-GDP widened meaningfully, to 76.9% at the end of March 2025, compared with the February 2024 budget projection of 74.1%. The ratio is now expected to peak at 77.4% in March 2026, (previously 75.3%), and moderate marginally over the following two years (Figure 6). The deviation from the initial budget projection can be attributed to several factors including National Treasury’s use of switch auctions, a higher cost of borrowing, and weaker GDP growth. The more bonds National Treasury switches into longer maturity notes instead of redeeming, the higher the overall debt stock, while elevated yields necessitate the issuance of more bonds to raise the same level of funding. We expect that these factors will persist, leading to further upward revisions in the debt-to-GDP trajectory.
Figure 6: Debt-to-GDP trajectory peaks at a higher ratio in 2025/26 compared with Budget 2024
Source: National Treasury, Matrix
Projected personal income tax growth of 9% this year may surprise to the upside
Accounting for 40%, personal Income tax (PIT) is the largest contributor to tax revenue. In 2024/25 PIT revenue increased by an exceptional R81bn, representing a 12.5% increase, significantly outpacing the average growth of 8% seen over the previous two years (Figure 7). This performance was primarily driven by bracket creep, the recruitment of over 800 additional SARS employees to strengthen tax administration, and revenue generated by tax on two-pot retirement fund withdrawals. As of February 2025, SARS estimated that it had collected R12bnfrom two-pot withdrawals, with some 6.5 million people (equivalent to 40% of retirement fund contributors) having withdrawn a total of R43bn.
PIT growth in 2025/26 should continue to benefit from same three factors: we have already noted that SARS has been allocated an additional R7.5bn in funding to further enhance tax administration; bracket creep has remained in place; and the two-pot withdrawals are recurrent, although they are likely to be lower due to the seed capital component being a once-off. In this context, NT’s estimated PIT increase of R63bn in 2025/26 looks feasible, if not slightly conservative. The flipside is that as PIT increases, disposable income falls, feeding into GDP growth constraints and two consecutive years of bracket creep will see a compounded effect on consumers, putting NT’s GDP growth forecasts at further risk.
Figure 7: Annual increase in PIT, Rbn and %y/y
Source: National Treasury, Matrix
A reprieve for South Africa’s geopolitical risk premium
Trade and diplomatic relations between South Africa and the US may see renewed momentum following the significant meeting between President Cyril Ramaphosa and his US counterpart on 21 May. The much-anticipated engagement, between the presidents of South Africa and the US took place on 21 May. While emotions ran high in the aftermath of the meeting, consensus is that President Ramaphosa was artful in managing to remain non-confrontational and steer the dialogue towards enhancing bilateral investment and growth opportunities.
Importantly, the Oval office meeting served as a strategic display of cohesion and strength for the Government of National Unity (GNU). South Africa’s delegation to the US included John Steenhuizen, leader of the Democratic Alliance (DA), as well as Johann Rupert representing business, and Zingiswa Losi, president of the Congress of South African Trade Unions (COSATU). This display of unity may contribute positively to domestic investor sentiment and is an important step in successfully navigating coalition politics. That this came in the wake of the recent dispute between the DA and the ANC over the National Budget’s proposed VAT increase and subsequent legal action taken by the DA challenging its constitutionality, has helped to allay fears about the future of the GNU.
To tariff or not to tariff
It’s difficult to keep up with which US tariffs have been announced, implemented, revoked, decreased, increased and/or imposed, but only for 90 days. President Trump’s latest announcement was to recommend a 50% tariff on the European Union, causing EU stock markets to weaken and bond yields to fall. In a separate development, the US president also took aim at Apple, threatening to impose a 25% tariff on the company if it does not start manufacturing iPhones in the United States. Even if judicial rulings block certain tariffs, the administration may still pursue alternative avenues to disrupt established trade arrangements. As such, tariffs are likely to remain a source of sustained uncertainty for global markets in the near term.
US markets and risks to remain the primary drivers of SA’s economic outlook
Looking ahead, we expect domestic risks will continue to take a back seat to US market moves, which are buffeted by conflicting forces. According to Yale’s Budget Lab, although the effective US tariff rate has fallen from a peak of 28% to 17.8%, it is still the highest since 1934 and high enough to weigh on growth and raise inflation. Adding to the complexity, concerns about unfunded tax cuts and US fiscal deterioration are undermining the US’s safe haven status, raising bond yields and lowering GDP growth. Not only is the path of the US economy unclear, but the response function of US assets may have changed, as indicated by bond yields rising in a rate cutting cycle.
