Izak Odendaal, Chief Investment Strategist at Old Mutual Wealth
Gauging the market reaction is tricky as the release of lower-than-expected US inflation data this afternoon boosted global risk appetite somewhat as it increases odds of Federal Reserve rate cuts. Nonetheless, this appears to be a relatively good (proposed) Budget from an investor’s point of view with an emphasis on fiscal consolidation and economic growth, but taxpayers have to cough up, with VAT increases and no bracket creep relief.
What counts as a “good” Budget for investors is not necessarily a “good” Budget for taxpayers or citizens.
The most notable and contentious item is the 0.5ppt VAT increases proposed for this year and next. These are not supported by the DA. Therefore, the debate will now move to Parliament where compromises must be reached, potentially adjusting the proposals. The final Budget could therefore be somewhat different to what was tabled today. This increases uncertainty, but the parties are likely to find one another.
Nonetheless, the emphasis on fiscal consolidation and boosting economic growth has support across the government of national unity (GNU) members. This is positive from an investment point of view.
In terms of growth-enhancing reforms, the focus is on the second term of Operation Vulindlela and infrastructure. Public infrastructure investment will add up to R1 trillion over three years, with the government to issue the first infrastructure bond.
In addition, there is a large focus on crowding in private sector infrastructure investing, for instance in new electricity transmission lines, and facilitating the creation of more public-private partnerships (PPPs).
These initiatives will take time to raise the growth rate. Treasury forecasts economic growth of 1.8% on average over the next three years. This is a vast improvement from the 0.6% growth in 2024 but is not enough to meaningfully address South Africa’s many challenges. There are also risks to this outlook from a potential global trade war.
The deficit projections are similar to the aborted February Budget, with a growing primary (non-interest) surplus over the medium term. This means the debt-to-GDP ratio expected to peak in the current fiscal year and drift lower thereafter. It also means that the high and unsustainable debt service burden – 22 cents on every rand SARS collects goes towards interest payments – will stabilise and eventually decline.
On the spending side, some of the increases proposed in February have been scaled back, notably social grant increases. The public sector wage increases will be implemented as agreed.
Treasury will present a spending review will be presented to Cabinet next month. It is unclear what it contains but does suggest that government realises it is not politically feasible to increase taxes without greater prioritisation and efficiency on the spending side. If done properly, it can find significant real savings but clearly won’t happen overnight.
In summary, South Africa’s fiscal position continues to gradually move in the right direction, but we’ll have to get used to a more complex Budgeting process under a coalition government. This introduces uncertainty but comes with the benefit of greater scrutiny and engagement with the inherent trade-offs. South Africa does not have easy choices left to make. All it can do is to make the difficult choices well.
ENDS
