Budget 3.0: pressure and expectations are building

With Budget 3.0 loading, economists expect that Minister of Finance Enoch Godongwana will deliver it on Wednesday afternoon with the blessing of the government of national unity (GNU) this time. The pressure is building along with economists’ expectations.

However, Godongwana will be walking a tightrope to balance politics and fiscal sustainability after two failed attempts in February and March due to opposition to the proposed VAT increases, Patrick Buthelezi, economist at Sanlam Investments, says.

“Political tension persists within the [GNU], particularly between the ANC and the DA, raising serious concerns about its durability.”

He pointed out that since Budget 2.0, the economic outlook has deteriorated due to global protectionist trade policies and unusually high economic policy uncertainty.

“We expect the finance minister to revise the gross domestic product (GDP) growth forecast downward from the March estimate of 1.9%, in addition to cancelling the VAT hike. Consequently, the revenue shortfall will be higher than the projected R75 billion over the medium term.”

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No political appetite to increase taxes in Budget 3.0

Buthelezi said there is clearly no political appetite to increase taxes, judging by the two failed budgets.

“Therefore, maintaining the government expenditure plans presented in budget 2.0 will result in a wide budget deficit and higher borrowing. The deficit will probably be wider in the near term, albeit the medium-term trajectory is expected to improve.

“National Treasury’s fiscal strategy is to limit borrowing and focus on stabilising elevated government debt by running the primary budget surplus. They will probably stick to that approach.

“In addition, debt servicing cost is very high, absorbing nearly 22% of the main budget revenue. Adding more debt would further divert resources from critical expenditures to interest payments, eroding fiscal space.”

He said Sanlam Investments expects Budget 3.0 to focus more on expenditure cuts. “However, there is limited time for a comprehensive expenditure review. Treasury would have done extensive work to present areas where savings are feasible during the medium-term budget policy statement in October.

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Godongwana expected to keep revenue-raising measures

“The revenue-raising measures announced in March will probably be maintained, such as not adjusting personal income tax brackets for inflation and introducing an above-inflation increase in excise duties. We are not expecting a new tax policy, but rather a continued effort to strengthen the South African Revenue Service (Sars).”

He said the persistent pressure on government finances is not a revenue problem, but rather a low economic growth trap.

“Government should prioritise growth-promoting areas, such as investment outlined in phase 2 of Operation Vulindlela to achieve a high growth trajectory in the future. Without an improved economic growth path, the debt trajectory will continue to rise.

“Finally, the GNU must collaborate more effectively to prevent volatility in the budget process and a potential fiscal credibility crisis. Overall, there are still a lot of unfunded expenditure pressures which raise execution risk.”

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Budget 3.0 not the only thing that needs GNU agreement

Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, say although it is an anomaly that Godongwana has to try to deliver the national budget for the third time this year, it may become a feature of the GNU.

“The original February budget proposed a 2% VAT increase from 15% to 17%. The revised March budget introduced a phased approach with a 0.5% increase to take effect on 1 May 2025, followed by another 0.5% increase on 1 April 2026, increasing the Vat rate to 16%.

“Scrapping the proposed VAT hikes left government with limited fiscal options. It now faces the challenge of identifying alternative revenue sources or significantly reducing and reprioritising expenditure. Against a challenging economic backdrop, achieving stronger revenue growth will be increasingly complex.”

The FNB economists pointed out that since the start of the year, the global environment has been marked by heightened uncertainty around trade and economic policy, primarily driven by US tariffs and escalating trade tensions.

As a result, they said, global as well as domestic growth forecasts have been revised down from the assumptions that would have underpinned the first two budgets tabled on 19 February and 12 March.

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Budget 3.0 allocations will have to be adjusted

They also pointed out that the International Monetary Fund (IMF) lowered its global growth projections to 2.8% for 2025 and 3.0% for 2026 from 3.3% previously. “Our forecast for South Africa’s real GDP growth has been revised to 1.3% in 2025 and 1.6% in 2026, from 1.9% at the start of the year.

“These weaker growth projections, coupled with the VAT freeze, point to a likelihood of a sizeable tax revenue shortfall.”

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano said government earmarked R46.7 billion for infrastructure investment over the 2025 Medium-Term Expenditure Framework in the previous budget statements, with:

• R23.4 billion for the 2025 public-service wage agreement and its carry-through costs,
• R11 billion for early retirement costs, and
• R35.2 billion for the Covid-19 Social Relief of Distress Grant (SRD).

“While adjusting allocations related to the public-service wage agreement and SRD grant will be difficult as [its continuation] is another recent outcome of judicial rulings, there may be some flexibility to scale back early retirement costs.

“Infrastructure investment could also be scaled down, but without escalated attraction of private sector savings, such spending reprioritisation would be concerning.”

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Budget 3.0 must also include fiscal consolidation

They say other spending allocations included R23.3 billion for an above-inflation increase in social grants, as announced in the 19 February budget, which was later revised down to R8.2 billion in the 12 March budget.

“Similarly, provisional allocations for frontline services were reduced from R75.6 billion to R70.7 billion between the two budgets. To offset a potential revenue gap, these allocations could face further reductions.”

The FNB economists said in the face of these challenges, government must still demonstrate a credible path towards fiscal consolidation. “However, there is a growing risk that the primary surplus, government’s key anchor for stabilising debt, will be under significant pressure.

“As a result, public debt may peak at a higher level than the 76.2% of GDP projected for 2025/26 in the 12 March budget. Our current baseline view incorporates these risks and is reflected in our sovereign rating outlook, which suggests that an upgrade by S&P Global of South Africa’s local and foreign currency ratings to BB and BB+ may be delayed until next year.”