By Reza Hendrickse, Portfolio Manager at PPS Investments

Finance Minister Enoch Godongwana delivered his much-anticipated Budget 3.0 address yesterday, with markets eager to learn how National Treasury planned to tackle the revenue shortfall caused by the cancelled VAT hike. With limited room to increase taxes and little appetite to cut spending, the budget emphasized promoting economic growth as the primary strategy for expanding revenue.

Spending and debt outlook

The combination of the cancelled VAT hike and a weaker economic outlook has led to tax revenue projections being revised downward by R61.9 billion over the next three years. To partially offset this, the government will increase the fuel levy and strengthen SARS’s capacity to enhance tax collection. These improved collection efforts could generate an additional R20 billion to R50 billion in revenue annually.

Non-interest expenditure is expected to grow by an average of 5.4% over the next three years, reinforcing the minister’s statement that this is not an austerity budget. However, the country’s debt trajectory is now projected to peak at 77.4% of GDP in 2025/26—1.2 percentage points higher than the estimate made in March.

Revised Growth Forecasts

Treasury’s trimmed growth forecast for this year, though lackluster, is substantially better than the 0.6% achieved in 2024. Growth is expected to accelerate to 1.6% and 1.8% in 2026 and 2027 respectively.

This is not overly exciting given that R1 trillion has been budgeted for in terms of investment in infrastructure to lift future economic growth. Encouragingly, according to the Bureau for Economic Research, growth could potentially reach 3.5% by 2029 should the benefits of structural reforms as laid out in Operation Vulindlela be achieved.

The market seems to have taken today’s budget in its stride, with bond yields and the rand largely unchanged. More broadly, clients have been well positioned across the PPS range this year. We have been somewhat defensively positioned given the state of the global economy and elevated uncertainty, and in SA we have favoured local equities over bonds, which has also worked out well given the JSE’s strength.