Economists have widely recognised the efforts of Finance Minister Enoch Godongwana in the Budget tabled on March 12 to balance fiscal sustainability and economic growth.

Standard Bank South Africa macroeconomic research head Dr Elna Moolman deems the single-most important feature in this year’s Budget as government’s unwavering commitment to fiscal consolidation, as well as the “tough love” approach to State-owned enterprise bailouts.

She says the National Treasury’s discussion document on fiscal anchors echoes Standard Bank’s view that this is not a “panacea”, since other countries with fiscal anchors have still not met their fiscal objectives, but it may still introduce beneficial guidance and focus to the fiscal negotiation process.

“The Budget is positive for financial markets if it gets enough support from the Government of National Unity (GNU) to be adopted. The Budget is a reasonable compromise between the interests and preferences of the major partners within this government.

“The growth support and fiscal consolidation reflected in the Budget underscores Standard Bank’s constructive stance on the rand and government bonds, though our stronger-than-consensus medium-term forecasts also require more supportive global fundamentals,” Moolman adds.

With the revised Budget proposing a new fiscal mix of spending, borrowing and taxing as a response to the previous opposition to the proposed two percentage point increase in value-added tax (VAT) to 17%, it now demonstrates a welcome emphasis on factors such as avoiding more borrowing, empowering the South African Revenue Service (Sars) to strengthen tax compliance and expediting infrastructure spending, comments North West University Business School Professor Raymond Parsons.

The promised comprehensive spending review is a step in the right direction, Parsons states, but adds that realistic timelines need to be set.

Additionally, although the VAT rate now only rises to 16% over the next two years, that may not be the end of the story, unless more strenuous efforts are made to rein in the spending side of the Budget, he notes.

He warns that the country risks drifting into a negative “tax-and-spend” fiscal cycle, which will eventually have damaging consequences for the economy unless higher growth generates more tax revenue.

“Whether the Budget has done enough to ignite economic growth to eventually reach the overall target of 3% GDP growth in the medium term is not obvious. This while the debt-to-GDP ratio is expected to reach 76.2% of GDP in 2025/26.

“Higher economic growth requires a stable macroeconomic environment complemented by rapid implementation of reforms and improved State capacity,” Parsons says.

Meanwhile, Investec describes the Budget as unsurprising from a financial market perspective, adding that a better economic environment is needed to increase economic growth. The firm maintains that increased political stability following the election of the GNU, and impetus for reform, will boost private investment and further GDP growth.

Investec agrees with Godongwana that stronger tax compliance is needed in the country. “By bolstering Sars’s capacity – with Commissioner Edward Kieswetter estimating this would raise R800-billion a year – it can eliminate the need for tax hikes and allow for lower borrowings,” the firm states.

Sars will get an additional R4-billion over the next three fiscal years to increase its ability to collect tax revenue.

PPS Investments portfolio manager Reza Hendrickse says the proposed one percentage point VAT hike over two years is still causing political rifts and it is unclear whether the Democratic Alliance and other GNU members will outright reject it again.

Hendrickse says there is more room for spending cuts, particularly in the public sector wage bill, but these aspects are usually politically unpalatable. He agrees with the other economists that South Africa requires improved tax collection efficiency and accelerated economic growth, but adds that an increased focus on deregulation will also support growth.

According to Nedbank, the persistent revenue shortfalls and expenditure overruns have finally come to a head, compelling the government to raise the VAT rate for the second time in less than a decade. While the smaller VAT hikes proposed for 2025 and 2026 make it more likely that Treasury will meet its revenue projects, the elevated expenditure growth still points to high execution risk.”

The bank adds that, while there is certainty on the wage bill over the next three years, the increases are still above the inflation rate.

While most economists welcome the fact that Treasury has clamped down on State-owned enterprise bailouts, Nedbank believes Transnet needed a capital injection to help lighten its debt burden.

Nedbank also ultimately expects the budget deficit to be higher than Treasury’s forecasts, remaining at just more than 4% by 2027/28.

Citadel chief economist Maarten Ackerman agrees that the Budget reflects a promising balancing act between fiscal consolidation and stimulating economic growth, but significant risks remain.

He cites these as being high fiscal risk given no additional contingency reserves – which renders South Africa vulnerable to future economic shocks; the high sovereign debt level; questionable growth projections on Treasury’s part; certainty lacking in infrastructure plan executions; and consumer strain.

Ackerman elaborates that Treasury forecasts 1.9% GDP growth this year despite the sluggish 0.8% growth in 2024, while the R1-trillion infrastructure investment plan relies heavily on private-sector participation in a still largely non-investment-friendly environment. 

PwC South Africa tax policy leader Kyle Mandy says increasing VAT is less harmful to the economy than many other tax options, while being easier to administer. That said, the two VAT increases will likely create a significant burden on business to implement the required changes to their systems.

PwC South Africa chief economist Lullu Krugel adds that while the VAT increase is not favourable to consumers, it is part of Treasury’s drive to get fiscal finances under control, which can have positive effects for the economy. She also welcomes the expanded list of VAT zero-rated products announced in the Budget.

For Stanlib chief economist Kevin Lings, the biggest disappointment in the Budget is the weak growth outlook over three years despite government’s focus on infrastructure and public-private partnerships.

Stanlib fixed income deputy head Sylvester Kobo adds that the VAT hikes will yield government about R43-billion in additional revenue, which still falls short of its needs, but with government planning to use cash reserves rather than raise new debt to meet shortfalls, the bond market has reacted positively.

Ultimately the economists all agree that economic growth is vital to enable fiscal discipline, which will require innovative funding, consolidation and enhanced State service delivery.