Izak Odendaal, Investment Strategist at Old Mutual Wealth

Compared to the fireworks of the first two proposed Budgets the third version was decidedly uneventful. However, in this context, boring is good, and the financial market response was muted. The key thing from investors’ point of view is that fiscal consolidation remains the priority. The debt and deficit ratios are similar to what was presented in March, though they are somewhat worse, partly due to weaker expected nominal growth. As a result of changes in US trade policies, global growth is expected to be lower and the domestic real economic growth outlook has been cut to 1.4% for 2025, 1.6% for 2026 and 1.8% for 2027. This is broadly in line with private sector estimates. Inflation is likely to be somewhat lower, reducing nominal growth. Weaker nominal growth tends to put downward pressure on tax collection.

Treasury will maintain a primary surplus, meaning that tax revenue is projected to exceed non-interest spending. It will rise over the medium term from 0.7% to 2.1% in 2027/28. The main budget deficit, which includes interest payments, is expected to continue narrowing over the medium term, reaching 3.2% of GDP by 2027/28. As a result, the debt-to-GDP ratio is expected to peak in the current fiscal year at 77.4% and drift lower over time.

Because of the high interest rate the government pays, debt-service costs are substantial. Interest payments will consume 22 cents of every rand SARS collects in but is also expected to peak and decline over time. As this debt-service burden gradually falls, there will be more room to spend on other important areas.

There will be no VAT increase this year, as expected. However, unspecified tax hikes are pencilled in from next year (around R20 billion per year), suggesting a small VAT hike could be back on the table, but Treasury will be sure to get political buy-in beforehand. If SARS improves collection, tax measures will not be necessary (SARS will get R4 billion to strengthen its capacity). As might be expected given the decline in global oil prices, the fuel levy will rise in line with inflation (by 16 cents/litre).

Without revenues from a VAT hike, some of the additional spending proposed in the first two attempted Budgets will be rolled back. Nonetheless, there is still a R180 billion increase to the baseline over the medium term, compared to R233 billion in Budget 2.0. This will support frontline delivery and infrastructure spending. Treasury plans to spend R1 trillion on infrastructure over the medium term. This a big number, but implementation will be key.

Debt is projected to stabilise at 77.4% of GDP in 2025/26, somewhat higher than the 76% projected in the March Budget. This is largely due to a lower denominator, as nominal economic growth will be slower – partly due to lower expected inflation.

Debt-service costs will consume 22 cents of every rand collected in revenue in 2025/26 – but this is expected to be the peak. As this interest burden gradually declines, there will be more room to spend on other important areas.

Treasury notes that spending reviews have identified “tens of billions” of savings that will be applied to future budgets and could possibly mitigate the need for tax measures in 2026.

There was no announcement of a lower inflation target, as discussions between Treasury and the SA Reserve Bank is still ongoing. With April inflation printing 2.8% this morning, it raises the odds of further rate cuts this year.

In a nutshell, the Budget was broadly neutral for markets in the short-term. The 2025 Budget represents broad policy continuity despite the various procedural disruptions. The country is still trying to rein in borrowing and stimulate economic growth. Evidence that this is happening will be positive for market valuations and lead to improved credit ratings.

ENDS