By: Johann Els, Old Mutual Group Chief Economist

South Africa’s highly anticipated national budget trilogy finale will take place on 21 May and is likely to show a significant revenue shortfall of more than R75 billion following two failed attempts to increase Value-Added Tax (VAT).

Old Mutual Group Chief Economist, Johann Els, says “the combined loss from cancelling the VAT increases planned for this year and next year totals around R75 billion”. In addition, likely downward revisions to growth and inflation will result in further revenue loss.

The February National Budget failed to be passed after it included a 2-percentage point VAT increase, which would have taken the rate from 15% to 17%. A March proposal to lift this tax to 16% over two years was reversed after a two-month-long battle.

The Minister of Finance, Enoch Godongwana, announced towards the end of April that the proposed 0.5 percentage point increase in VAT in both 2025 and 2026 had been withdrawn, followed by the Cape High Court issuing an order prohibiting the Minister from proceeding with a VAT increase.

In the absence of a VAT hike or major new taxes, Els suggests that government could consider a combination of options. These include a potential petrol levy increase (but no other tax increases), which may generate some additional revenue, while the other is to revisit strategies from the early 2000s, such as including a line item in the budget for improved tax collection (worth up to R5bn)

Els also notes that neither of these will be enough to cover the full shortfall. Therefore, significant expenditure cuts, totaling over R75 billion over three years, will be required. And given the added pressure from lower growth and inflation, the real gap may be even larger.

“One practical approach could be to focus the budget only on this fiscal year for now. This would lower the immediate consolidation burden. The October Medium-Term Budget Policy Statement could then be used to flesh out plans for the outer years,” says Els.

“Political cooperation is also essential. Parliament must approve this budget, so consensus among the main parties is important,” says Els.

National Treasury will likely revise gross domestic product growth forecasts downward from 1.9%, says Els. His projection for gross domestic product (GDP) growth is 1.5% for the year, down from over 2%, largely due to the impact of the global trade slowdown on South Africa.

“However, there are upside risks: cyclical tailwinds, lower inflation, reduced interest rates, rising confidence, and fewer structural constraints. These could all support stronger growth than currently forecast, especially as global trade tensions ease” Els says.

Els adds that, “similarly, the inflation forecast for this year, which was 4.3%, is now expected to come in about one percentage point lower”.

Both lower GDP and inflation will adversely affect tax revenue, says Els. The key now is fiscal discipline, he says.

It is crucial that National Treasury sticks to the deficit and debt targets outlined in the first two versions of the budget, Els notes.

These targets include:

• A budget deficit target of 4.6% of GDP for this year, tapering down to 3.5% of GDP over the medium-term.
• A primary surplus target of -0.9% of GDP this year, increasing to +2% over three years.
• And debt-to-GDP ratio peaking at 76.2% this year and stabilising thereafter.

“Markets and ratings agencies will react negatively if these targets are missed, especially if revenue shortfalls are covered through more borrowing,” says Els.

Els adds that, “if National Treasury presents a credible budget that adheres to these targets, implements some expenditure cuts, and maintains reasonable growth expectations, then ratings agencies could begin upgrading outlooks”.