Key focus areas when finance minister Enoch Godongwana delivers his revised 2025 Budget Speech on Wednesday will include the increase in net new spending and its composition, along with proposed tax increases to fund this new spending and the implications for economic growth, says Tertia Jacobs, treasury economist at Investec.

Jacobs pointed out that the February 2025 Budget was rejected due to a proposed two percentage point increase in VAT aimed at financing an increase in non-interest spending.

“This proposal was unexpected, as the October 2025 MTBPS did not indicate any such intention. National Treasury estimates that a two ppt VAT increase could generate R60.0 billion, R63.7 billion and R67.3 billion over the next three years, totalling R191 billion.

“This revenue is intended to finance a net increase in new spending of R173 billion during the same period.”

Given South Africa’s elevated debt levels, currently at 76% of GDP, and debt servicing costs consuming 21.1% of gross tax revenues, the economist said that the National Treasury is focused on stabilising debt by maintaining a primary budget surplus throughout the Medium-Term Expenditure Framework (MTEF).

“An increase in spending without a corresponding rise in revenues would jeopardise the estimated primary budget surplus of 0.5% of GDP (approximately R34 billion) for the fiscal year 2024/25,” she warned.

The anticipated multiplier effect of the proposed budget is low, she said, suggesting that the economic benefits of the increased spending may not be sufficient to stimulate significant growth.

“This raises concerns about the effectiveness of the budget measures in fostering a robust economic environment and the need for more tax increases in coming years if the proposed spending trajectory is extended,” Jacobs said.

A proposed VAT increase, alongside the zero-rating of additional foodstuffs and adjustments to tax brackets for lower-income earners, will likely negatively imapact middle- and high-income taxpayers, who are already subject to high tax burdens.

Investec pointed out that National Treasury’s 2025 GDP growth forecast has been revised to only 0.2 ppt higher at 1.9% (compared to the previous forecast in October 2025), with consumption spending projected to grow from 1.8% to 1.9%.

However, the downward revision of GDP growth by 0.6% for 2025, from an earlier estimate of 0.7% in 2026, has led us to adjust our own 2025 forecast downwards to 1.6%, with associated downside risks.

The proposed increase in current spending is primarily focused on the following areas:

–Enhancing Compensation and Hiring: A significant portion (21.6%) is allocated to improving compensation and hiring additional personnel in front-line departments.
–Other Spending Initiatives: Another 21.6% is directed towards various spending initiatives, including employment programmes, the South African National Roads Agency Limited (SANRAL), debt repayment, SANDF troop deployment in the Democratic Republic of the Congo (DRC), local government elections, and direct charges.
–Infrastructure Investment: The remaining 26.9% is earmarked for infrastructure investment, which includes R19.2billion allocated to the Passenger Rail Agency of South Africa (Prasa) and R11.8 billion for the Budget Facility for Infrastructure Window 8 projects.

A spending review, expected to take three to six months, would be a constructive step in addressing fiscal challenges, said the economist.

Over the past decade, National Treasury has managed non-interest spending while providing R520 billion in bailouts to state-owned enterprises (SOEs), leading to stagnation or decline in real spending per person since 2016.

This underscores the need for increased funding for front-line services and greater efficiency in government spending, Investec said.

The October 2024 MTBPS highlighted plans for spending reviews on the social grant system and skills levy, with results expected in the 2025 Budget. However, these reviews have yet to be carried out.

The MTBPS also pointed out the fragmented approach to financial support for unemployed individuals, as various agencies operate without an integrated system.

The government is considering reforms to the grant system and exploring consolidation of public employment initiatives, including a review of the R22.7 billion allocated to skills development for 2024/25.

President Ramaphosa received a 2019 report on the reconfiguration and rationalisation of administrative processes, which remains relevant to these ongoing discussions.

Media reports suggested that the minister of finance has linked the proposed 2% VAT increase to the financing of a permanent social grant.

In the short term, several scenarios for tax increases are proposed based on the net increase in spending. Given that a 2% VAT increase is unlikely to be enacted, Jacobs said that a combination of tax increases appears more probable:

Spending Increase of R25 billion

-VAT remains unchanged at 15%
-Bracket creep: R16bn
-Fuel levy: R4bn
-Medical aid tax credit: R2bn
-Customs duties: R3bn

Spending Increase of R30 billion

-0.5 ppt increase in VAT: R15bn
-Bracket creep: R16bn
-Zero rating of food products and bracket relief for two lower income groups

Spending Increase of R40 billion

-0.75 pp increase in VAT: R22bn
-Bracket creep: R16bn
-Potential fuel levy increase: R4bn
-Zero rating of food products and bracket relief for two lower income groups

Pension Contribution Holiday

-A government contribution holiday for the GEPF amounting to R53 billion, which could be combined with a spending review.

Corporate Income Tax and Wealth Tax

• An increase in corporate income tax and wealth tax is considered highly unlikely.