Finance Minister Enoch Godongwana indicated that major reforms are being considered to both State spending and the actual Budget process when tabling a third version of the contentious 2025 Budget in Parliament on Wednesday.

The first two versions failed to secure political support inside and outside of the Government of National Unity (GNU), creating an unprecedented Budget crisis for the country and raising the spectre of a possible collapse of the multiparty GNU itself, formed only months earlier.

As anticipated, the latest version excludes earlier proposals to increase the value-added tax (VAT) rate, which lay at the heart of both the abandonment of the initial tabling on February 19, as well as the legal and political fights that ensued after the March 12 tabling.

This, despite a big reduction in the VAT proposal in the March version to a one percentage point hike over two years, rather than the two percentage point immediate hike contained in the February Budget Review.

In a briefing, Godongwana said there had been a failure to anticipate the changes that political parties expected with regards to the Budget following the reality that no single party won a majority in the 2024 elections.

He added that a new process of consultation was required, and that parties had also learned a significant amount about what was involved in legally amending a Budget over the past few months.

The process he said was necessarily “cumbersome”, as any change needed to meet the same thresholds of fiscal prudency and rationality to which the National Treasury had to comply when drafting a Budget.

"The debate and negotiations have deepened our understanding of policy trade-offs and institutional processes, while giving citizens unprecedented visibility into our democracy's evolution.

"Negotiation, debate and compromise, as we have seen unfold over the last weeks, has been a necessary, if sometimes painful investment in the productivity of future government reform in the new political environment," he added in his speech.

The documentation released with ‘Budget 3.0’ confirmed that efforts would be made to enhance the Budget process, with director-general Duncan Pieterse acknowledging that it had not been a “normal” Budget.

“For its part, the National Treasury is committed to learning from and building on this experience to ensure that our budget process remains highly transparent, accountable and faithful to our constitutional mandate,” Pieterse stated.

The National Treasury indicated that government was also developing a framework for public participation as part of its review of the Budget process.

“The review will help clarify the role of structures that provide inputs to the budget and enhance public consultation,” the National Treasury said, indicating that changes to the process would be implemented over time.

“These reforms will be designed to strengthen government and institutional commitment to fiscal sustainability, refine budget prioritisation and the functioning of budget structures, and improve data systems and capital budgeting, monitoring and reporting.”

Priority would also be given to improving the efficiency and effectiveness of public spending, highlighting that previous reviews by the National Treasury and provincial treasuries of R312-billion-worth of spending programmes since 2013 had identified savings of R37.5-billion.

These savings could be achieved by changing operating models, improving oversight, or closing programmes that no longer achieved their intended objectives, with specific reference made to greater efficiency in procurement, information and communication technology and infrastructure management.

Reforms flowing from the recent review of public employment programmes and active labour market programmes would also be implemented, after that review pointed to a “mixed” performance of the individual programmes.

A process was also under way to identify ghost workers and other payroll irregularities using a new data-driven approach to detect anomalies across national and provincial departments.

“If government achieves significant savings from implementing the recommendations of these reviews, it may mitigate the need for additional tax measures in the 2026 Budget,” the National Treasury said, adding that updates would be provided in the 2025 Medium-Term Budget Policy Statement in October.

The National Treasury was also consulting on the ‘fiscal anchors’ discussion document published in March as part of identifying long-term measures to “prevent a recurrence of the cycle of high spending, high deficits and high debt”.

GROWTH & BUDGET REVISIONS
Despite the exclusion of VAT hikes, tax revenue is still expected to rise from R1.86-trillion in 2024/25 to R2.29-trillion in 2027/28, representing a R61.9-billion downward revision from the March 12 proposal that included the VAT hikes, as well as more bullish growth projections than is the case in Budget 3.0.

The Minister confirmed that South Africa’s economic outlook had weakened since his March tabling, and revised the country’s 2025 GDP growth to 1.4% in 2025, from the March forecast of 1.9%. Medium-term GDP growth is expected to average 1.6% from 2025 to 2027, weaker than the previous forecast of 1.8%.

The downward revision to the 2025 growth outlook remained above market expectations, however, as well as the 1% outlook included in the International Monetary Fund’s most recent growth projection.

The tax measures outlined for 2025/26 are expected to raise R18-billion on the back of no adjustment to personal income tax brackets and rebates, and above-inflation increases in excise duties on alcohol and tobacco products; measures that would persist until the 2027/28 financial year.

In a significant change, the first fuel levy increase in three years was announced, with the general fuel levy to increase by 16c/l for petrol on June 4, while diesel will rise  by 15c/l.

Godongwana also announced that the 2026 Budget would propose tax measures to raise additional R20-billion in revenue.

This would include increasing financing to the South African Revenue Service (Sars) to improve tax administration and raise compliance, with the aim of increasing revenue from tax-related debt collection by R20-billion to R50-billion yearly.

Some R7.5-billion had been allocated to Sars for the coming three years to improve tax administration, and commissioner Edward Kieswetter indicated that 500 new debt collectors had been recruited and trained with a further 250 to be recruited in June.

Having recovered about R95-billion in 2024/25, Kieswetter said it was targeting recovering at least R120-billion during the current financial year on the back of the investments being made.

DEBT-TO-GDP BACKSLIDE

Nevertheless, the Minister confirmed a 1.2% deterioration in the gross debt-to-GDP outlook, which is now forecast to peak at 77.4% in 2025/26, instead of the 76.2% forecast in March. The ratio would also remain elevated at 77.2% (75.9%) in 2026/27 and 76.7% (75.1%) in 2027/28.

Gross government debt, meanwhile, is expected to increase from R5.69-trillion in 2024/25 to R6.09-trillion in 2025/26 and R6.82-trillion in 2027/28. The gross borrowing requirement is projected to decline by a total of R30.2-billion between 2024/25 and 2027/28, however, owing to lower projected spending relative to the March Budget Review.

Debt-service costs will consume 22c of every rand collected in revenue in 2025/26, and government will spend R1.35-trillion servicing debt over the three-year spending period.

Total consolidated spending in Budget 3.0 is expected to grow at an average annual rate of 5.4%, from R2.4-trillion in 2024/25 to R2.81-trillion in 2027/28, with total spending additions over the three-year horizon amounting to R180.1-billion, as compared with the R232-billion outlined in June.

Included in the additional spending is R20.8-billion for compensation and essential services in health, including the employment of 800 doctors; R19.5-billion for provincial education to safeguard about 5 500 posts; a R1.6-billion increase in social grants in 2025/26; R35.2-billion to extend the temporary Covid social relief of distress grant for a single year; R23.4-billion for the 2025 public-service wage agreement and carry-through costs; R5.5-billion for the early retirement costs targeting about 15 000 public service employees over two years; and a R3-billion allocation to the South African National Defence Force for the Southern African Development Community mission in the Democratic Republic of Congo, including to cover immediate withdrawal costs.

It also allocates an additional R33.7-billion for critical infrastructure projects, including support for projects approved as part of the Budget Facility for Infrastructure; investments in passenger rail; and R6.4-billion to reverse declining water, electricity and solid waste services in cities.

However, the Minister warned that other spending pressures might arise later in the year, referencing in particular the funding shortfall that would arise as a result of the decision of the US government to halt funding under the President's Emergency Plan for AIDS Relief programme. The Department of Health was still quantifying the shortfall with the help of an accounting firm.

Government would also consider extending more guarantees to Transnet to enable it to refinance maturing debt and continue with its capital investment programmes.

The consolidated Budget deficit for 2024/25, projected at 4.5% of GDP in the 2024 Budget, is now estimated at 4.8%, but the deficit is projected to decline to 3.4% of GDP in 2027/28.