Predictions on the Budget Speech 2025

Suspension of the US aid to South Africa are among the many challenges the South African Ministry of Finance (MoF) will have to navigate, while other pressing issues are also knocking on the proverbial “door”.

The 2024/25 budget highlighted the fact debt servicing cost is eating away at South Africa’s finances with an ever-growing percentage of tax revenue being paid to debt related costs, specifically at the expense of other much needed other services from Government. Total debt servicing cost of the South African fiscus was calculated to reached R382bn for the 2024/225 financial year or put differently, around 16.1% of expenditure listed by the MoF for the previous financial year.

Other significant receivers of government funding for the 2024/25 financial via National Treasury included the following categories or departments:

• Basic education (R303bn)
• Social protection (R387.3bn) which include among others:
  • Old-age grant (R107.0bn)
  • Social security funds (R89.0bn)
  • Child-support grant (R85.8bn)
  • Other grants (R73.4bn)
• Health services (R271.9bn)
• Community development (R265.3bn)
• Economic regulation and infrastructure (R146bn)
• Post-school education and (R146.0bn)
• Police service (R125.0bn)

Taxation funds these expenditure items, and the shortfall is borrowed on capital markets by the issuances of bonds, both locally and internationally. It should be noted that National Treasury also made no adjustment to the income tax bracket ranges, ie. bracket creep, and therefore utilised inflation as a n additional inflationary “tax” on the economy to fund budget expenditure items in an attempt to slow the South African “debt need”.

Consolidated tax revenue in February 2024 was forecasted at R2 036.6bn or rather R2.03tr with government total expenditure forecasted at R2369.0bn or R2.37tr, leaving South Africa with a shortfall in taxation revenue of R332.4bn that would have required loans (bonds) to fill the gap in funding. This shortfall of R332.4bn was estimated to be 4.5% of the budget balance and also around 5.1% of the forecasted GDP at that stage.

This picture however changed somewhat with the Medium-Term Budget Policy Statement (MTBPS) the minister of finance Enoch Godongwana delivered in October 2024. In the MTBPS speech the minister highlighted that tax revenue collection would in all likelihood not reach the February 2024 target and was subsequently lowered from R2036.6bn to R2021.5bn for the current fiscal year, while projected government expenditure increased from R2369.0bn to R2395.0bn during the same period.

The lowering in tax revenue forecast while increase in forecasted expenditure also mean that the budget balance or in other words the budget shortfall increase from R332.4 bn to R373.5b for the 2024/25 fiscal year. This also meant that the budget balance as ratio of total tax revenue increase from 4.5% in February 2024 to 5.0% in October 2024. The increase in the budget translates into the expansion in government/state debt from 74.1% of GDP to 74.7% just highlighting another deterioration in South Africa’s debt situation.

This deterioration in South Africa’s debt situation comes at a huge cost given our international fiscal rating and being on the international grey list with respects to flow of funds internationally. Being below investment grade as measured by the rating agencies such as Fitch, S&P and Moody’s and being on the financial grey list means that South Africa pays a premium on borrowing costs to “compensate” investors with the “risk” associated with South African bonds in the international market. Higher borrowing costs increase debt repayment costs and leaving the government with less funds available to fund much needed goods and service in South Africa, creating a vicious debt cycle that can push any country into financial hardship if budgets aren’t balanced while economic growth remains sluggish.

The budget could see some interesting points following the State of the Nation Address (SONA) and the points president Ramaphosa touched on during the speech. In the SONA president Ramaphosa mentioned that R940bn is allocated to infrastructure maintenance and development over the next three years which include R375bn to be spent by State Owned Enterprises (SOE’s). Water infrastructure will receive almost R38bn for much needed upgrades and maintenance of South Africa’s critical water infrastructure. The Infrastructure Fund also allocated R23bn to seven large water infrastructure projects and the South African government also ended delays in Phase 2 of the Lesotho Highlands project and the Umkhomazi dam construction.

In the SONA the president mentioned the creation of a R20bn transformation fund while also pushing ahead with the National Health Insurance act (NHI). The NHI remains a very contentious item on the list as to the ramifications it potentially could have on the medical profession and medical professional “brain drain” that South Africa can ill afford at this stage. The other challenge surrounds the funding of the new NHI model given the state that government finances are in at this stage notwithstanding the ticking time bomb of the South African debt situation, repayment of loans and being sub-investment level with regards to government debt and bonds at this stage.

Suspension of USAID assistance to South Africa and PEPFAR program created a 17% “unforeseen” gap in current funding requirement by the Department of Health in South Africa. This “funding gap” will have to be “plugged” by some means or perhaps taking funds from other departments or increasing taxation in various form throughout economy on citizens and businesses. The funding gap in health is not the only concern at this stage with other lofty ideas such as the R20bn transformation fund and R940bn in infrastructure spent in the next three-to five years will increase South Africa’s funding requirement, either through increased taxation or additional borrowing in the medium-term at least.

National Treasury (NT) gave assumptions regarding Tax Revenue, Expenditure and the Budget balance in the October 2024 MTBPS speech. These numbers can be seen in the Table below.

Table1: MTBPS National Treasury assumptions

This increase fiscal year-on-year percentage change and Tax Revenue, Expenditure and the Budget balance based on National Treasury assumptions can be seen in Table 2.

Table2: MTBPS National Treasury assumptions YoY percentage change

It is evident from the above Tables that National Treasury expects that tax revenue collection to hold steady over the medium term and growing by around 6.8% during this period while government expenditure growth will expand less rapidly. The effect of this is that the Budget balance, South Africa’s borrowing requirement, to come down over the medium-term.

Our view is slightly different from what we already know just by analysing what president Ramaphosa stated in the SONA. The infrastructure fund of R940bn will require some kind of funding, not to mention the “shortfall” or “gap” of 17% in the Department of Health’s budget due to a suspension of US aid and the looming NHI and the funding requirement that goes with it.

Further to these points, a R20bn Transformation fund for the next five years has been mentioned and too will require funding from somewhere. As a result of just these points, a conservative projection towards government expenditure was taken and only forecasted to expand by 6.5% per year over the next three years while an increase in revenue of 7.0% over the next three years was assumed. The assumption of 7.0% growth in tax revenue is assumed due to some economic recovery, higher confidence levels in the South African economy by both consumers and businesses, stable electricity supply, low or moderate inflation and increased tax collection efficiency by the South African Revenue Service (SARS).

Based on these assumptions and that National Treasury usually increases the tax revenue target for the previous year to be concluded on the 31st of March 2025, it is expected that tax revenue estimate from National Treasury will increase from R2021.5 assumed in October 2024 to R2025bn February 2025, an expected increase of 4.3% YoY from the 2023/24 financial year. See Table 4 for the outcomes based on these assumptions explained above.

Table 3: Aluma Capital assumptions

Table 4: Effect of Aluma Capital assumptions on Total Government Finances

The Rand value difference per year Aluma’s view will have on the finances of South Africa as a country can be seen in Table 5.

Table 5: Difference of Aluma Capital’s view per year for State Finances

According to these basic assumptions we can only assume that state borrowing will continue to rise as taxation alone on an already heavily burdened small tax base cannot fund these ambitious new initiatives alone, not to mention the widely mooted Basic Income Grant (BIG) that is also being discussed in the corridors of government.

It is our view that Minister of Finance, Godongwana, will have a real hard time balancing the “books” with respects to South Africa’s finances in the medium-term and that some serious hurdles are expected along the way. Challenges mentioned in this article just touched the most obvious and glaring ones most economists and analysts have been writing about in the last few weeks. The effect of cancelling or losing South Africa’s preferential treatment with regards to access in the US market due to the AGOA agreement haven’t been analysed and how that could influence the South African economy going forward. The South African economy is currently “faring in rough seas” and experienced heads and all hands-on deck will be needed to steer “us” collectively through these challenging times we as a country are currently facing.