Budget 3.0: Dry as a bone, debt levels peaking but promises to root out ghost workers to make up cash shortfall

News24

21-05-2025

The third iteration of the national budget holds no major surprises; in fact, it is fantastically unspectacular. The expenditure framework remains largely unchanged as espoused in the second budget presentation in March.
As Finance Minister Enoch Godongwana says:
'This is not an austerity budget. It increases non-interest expenditure by an average of 5.4% over three years. In real terms, this is 0.8% growth. It is also a redistributive budget. It directs 61 cents of every rand of consolidated, non-interest expenditure towards the social wage. He says:
This is money that will be spent to fund free basic services like electricity, water, education, healthcare, affordable housing, as well as social grants for those in need.
'This budget invests over R1 trillion in critical infrastructure to lift economic growth prospects and improve access to basic services.'
Godngwana also sought to explain what the debate around the national budget was:
'The debate is not about baseline allocations. So, what has been the problem? By how much should we increase the budget? In particular, social services? Why? Well, DGs from a number of departments receive reports of where there are shortfalls, and how do we react to close those shortfalls? The shortfall was R230 billion, and there is R180 billion in this budget to close that gap.'
'But the question remains: are we committed to fiscal targets? Yes. We will see a peak of the debt-GDP ratio, the deficit is declining, and fiscal sustainability remains the core. So, the commitment remains.'
The deputy finance minister, Dr David Masondo, expanded: 'We have a R1 trillion infrastructure spend over the MTEF, but we don't want to rely only on the budget but are making it easier for private sector participation.
'Structural reforms are being implemented, particularly in energy, roads, logistics and water, to allow for private sector participation. We have made it easier for third-party participation in freight rail.
'The transport department is undertaking reforms and will be calling for requests for proposals by November to enable private sector participation.
'What we have done is identify billions in waste. We will also target ghost employees. But critical services are protected, and baseline spending remains.'
There are no increases to personal income taxes or VAT. Spending has been revised downward from R2.8 trillion to R2.5 trillion.
However, to make up for the shortfall in the exclusion of VAT increases, government has decided: To replace a portion of the lost revenue from the withdrawal of the VAT rate increases. Government proposes an inflationary increase in the general fuel levy for petrol and diesel to R4.01c/l and R3.85c/l, respectively, effective from 4 June 2025.
Total combied fuel taxes on petrol and diesel
Treasury
However, the budget is presented against the backdrop of a difficult international environment, characterised by trade volatility and policy uncertainty.
'As global growth has faltered, South Africa's economic outlook has also weakened, with GDP expected to grow by only 1.4% in 2025 from a previously projected 1.9%. Global risk and economic weakness reinforce the need for us to put our fiscal house in order,' says Treasury director-general (DG) Duncan Pieterse.
The fiscal strategy remains on course so that government can spend less on debt-service costs and more on critical public services. Pieterse adds:
As per our commitment, government debt will stabilise in 2025/26 at 77.4%t of GDP. For the first time since the 2000s, government is consistently running a primary surplus, where revenue exceeds non-interest expenditure.
'In time, this growing surplus will reduce rising debt-service costs. These costs will consume 22 cents of every rand collected in revenue in 2025/26—money that could be better spent to build fiscal shock absorbers and fund health, education and security.'
'Government will spend R1.35 trillion servicing the debt over the three-year spending period.'
To mitigate the shortfall in revenue expected from proposed and now rejected tax increases, government will embark on major reforms to state spending and the budget process is also under consideration.
According to the DG: 'Public spending is inefficient. Previous spending reviews have identified tens of billions of rands in potential savings from poorly performing programmes that can be redirected in future budgets. Concurrent reforms are being prepared to strengthen the budget process as the foundation of sustainable public finances and to expand public participation.
'Spending reviews—technical tools that support the credibility of public expenditure—have identified tens of billions of rands in potential savings from poorly performing or inefficient programmes that can be redirected in future budgets. 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.'
Treasury
'Economic growth projections were lowered over the past two months in light of a weaker global outlook, trade frictions, increased uncertainty and lower projected investment. Geopolitical tensions and reconfiguration of supply chains remain a risk to foreign investment. In 2025, GDP is expected to grow by 1.4%, improving to 1.8% in 2027.
'Government's economic priorities remain strengthening macroeconomic stability to reduce living costs and grow investment, executing reforms to promote a more dynamic economy, building state capability in core functions and supporting growth-enhancing public infrastructure investment.
DEBT
Revised debt-to-GDP ratio set to peak at 77.4%, the highest since 1994. Gross loan debt is expected to increase from R5.69 trillion in 2024/25 to R6.82 trillion in 2027/28. Net loan debt—gross loan debt less cash balances—will increase from R5.47 trillion to R6.7 trillion over the same period.
Gross loan debt is now expected to stabilise at 77.4% of GDP in 2025/26 and decline thereafter. This is higher than the 75.3% projected in the 2024 Budget, and higher than the 76.2% projected in the March 2025 Budget Review, mainly due to weaker growth forecasts.
Put differently, this means in 2025/26 alone we are spending around R1.2 billion per day to service our debt.
Ironically, when asked whether National Treasury was losing the battle against rising debt, Godongwana said: 'We are not losing the battle. The rise in debt to GDP is not a result of fiscal slippage. The 77.6% is a mere manifestation of a nominal reduction in GDP.'
Read into that what you will, but S&P may have a different opinion, and does.
The DG says: 'Budget reforms to improve the quality of spending and root out waste The National Treasury and provincial treasuries have assessed over R312 billion in spending programmes since 2013, highlighting shortcomings in policy costing, implementation and oversight that lead to duplication and waste. Previous reviews have identified savings of R37.5 billion that can be achieved from changes to operating models and improvements in oversight.
'In some cases, programmes no longer achieve their intended objectives and should be closed. To take these recommendations forward for the 2026 medium-term expenditure framework (MTEF) period, the budget process will be redesigned to close low-priority or underperforming programmes and achieve greater efficiency in procurement, ICT and infrastructure management.
'The process will also implement reforms flowing from the recent review of public employment programmes and active labour market programmes discussed in the 2024 MTBPS. That review found that while the portfolio is comprehensive, the effectiveness and efficiency of individual programmes is mixed.
'Flowing from government's recently initiated review of conditional grants, the National Treasury will implement a range of reforms to improve how infrastructure programmes and projects are planned, procured, contracted and implemented in provinces and municipalities. In addition, government has begun a process to identify ghost workers and other payroll irregularities.
'Previous initiatives to uncover ghost workers relied on an inefficient census methodology. The new data-driven approach will integrate multiple administrative datasets, more easily detecting anomalies.'
When asked whether the Reserve Bank has made any progress in reviewing the inflation target, the deputy governor, Fundi Tshazibana, said: 'Our technical teams are quite advanced in technical reviews and are almost ready to submit proposals to both the bank and finance ministry. However, we are not yet in a position to make an announcement.'