Finance Minister Enoch Godongwana delivered the much-anticipated 2025 National Budget Speech on Wednesday, 12 March. The budget outlined key aspects of South Africa’s current economic landscape, projected economic growth, the country’s increasing debt burden, planned tax adjustments, and continued social relief measures.
Key Takeaways
- Higher Taxes and Inflationary Pressure: The VAT increase to 16% over two years, combined with the decision not to adjust personal income tax brackets for inflation, will put additional financial pressure on households. Lower-income consumers are expected to bear the brunt of these changes, despite the government’s attempt to expand the list of zero-rated food items.
- Debt and Fiscal Challenges Persist: With debt-service costs consuming a significant portion of government revenue, South Africa’s rising debt burden remains a major concern. The debt-to-GDP ratio is expected to peak at 76.2% in 2025/26, raising questions about long-term fiscal sustainability and limiting the government’s ability to invest in key public services.
- Economic Growth Remains Modest: While GDP growth is projected to reach 1.9% in 2025, it remains well below the level needed to drive meaningful structural transformation. Without major policy interventions in energy, labour, and investment, economic stagnation may continue to hamper job creation and broader financial stability.
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Among the significant elements of the budget was the controversial increase in value-added tax (VAT), which has been a topic of debate in the weeks leading up to the announcement. While the increase has been revised to 1 percentage point over the next two financial years, concerns remain about its potential impact on households and businesses. Economists have warned that the VAT hike could disproportionately affect lower-income households, placing additional strain on already stretched budgets.
To counterbalance the effects of the VAT hike, Godongwana confirmed that personal income tax brackets and medical aid tax credits would not be adjusted for inflation, a decision that will affect taxpayers across all income levels. This effectively means that despite nominal salary increases, many South Africans will end up paying more tax, reducing their disposable income and limiting household spending power.
South Africa’s Economic Growth Projections
Over the past decade, South Africa’s economy has experienced sluggish growth, averaging below 2% annually. According to the finance minister, the economy expanded by only 0.6% in 2024. However, projections indicate a slight improvement, with average GDP growth expected to reach 1.8% from 2025 to 2027.
Godongwana emphasised that for the country to meet its broader economic and social goals, including redistribution and structural transformation, a much higher and more inclusive growth rate is required. The medium-term economic outlook is supported by increased investment, stronger household consumption, stable inflation, moderate employment gains, and an improving financial position for households. However, economic experts remain sceptical, pointing out that without major structural reforms in energy, labour markets, and regulatory policies, South Africa may struggle to break out of its low-growth trap.
Real GDP growth is forecast to reach 1.9% in 2025, before slightly declining to 1.75% in 2026, and returning to 1.9% in 2027. Additionally, the consolidated budget deficit is set to narrow from 5% of GDP in 2024/25 to approximately 3.5% in 2027/28. Despite these projections, the reality remains that economic growth has consistently underperformed expectations in recent years, leaving little room for misplaced optimism.
While the national budget attempts to reinvigorate economic growth, a sobering comparison from recent headlines—South Africa’s GDP overshadowed by Elon Musk’s wealth—serves as a powerful reminder of the disparity between individual wealth and national output, and the urgency for structural reform.
South Africa’s Rising Debt and Its Consequences
The budget deficit and increasing government debt remain significant challenges. Debt-service costs for the 2024/25 financial year have been revised upwards by an additional R33.6 billion, bringing the total to R389.6 billion. This equates to 22 cents of every rand collected in revenue being allocated to servicing debt.
To provide context, government spending on debt-service costs now exceeds the total budgets allocated to healthcare, policing, and basic education. The country’s debt burden is projected to peak at 76.2% of GDP in 2025/26, highlighting the ongoing fiscal pressure on the state.
This growing debt load raises serious concerns about South Africa’s fiscal sustainability. With borrowing costs escalating, future governments will be left with little fiscal space to respond to economic crises or expand critical public services.
VAT Increase and Its Impact
The National Treasury will implement a staggered increase in VAT, with a 0.5 percentage point rise on 1 May 2025, followed by an additional 0.5 percentage point increase on 1 April 2026, bringing the total VAT rate to 16%.
While this increase is lower than the initially proposed two percentage points, concerns remain about its inflationary impact and the potential strain on consumer spending. Sectors such as retail and manufacturing are expected to feel the effects of this adjustment. Many businesses are likely to pass these additional costs onto consumers, further driving up inflation and potentially slowing economic recovery.
To mitigate the impact on lower-income households, the government has expanded the list of zero-rated food items. Exemptions from the 16% VAT rate will now apply to canned vegetables, dairy liquid blends, and various organ meats from sheep, poultry, and other animals. Consumer advocacy groups argue that while these exemptions are helpful, they do not go far enough to cushion the impact on poorer households.
Eskom Debt Relief Adjustments
Godongwana provided an update on Eskom’s financial position, stating that the utility is in a more stable state compared to 2023, when the initial debt relief package was introduced.
As a result, the final phase of the Eskom debt relief package has been modified. The government will replace the originally planned R70 billion debt takeover with a reduced package of R40 billion in 2025/26 and R10 billion in 2028/29, leading to an estimated R20 billion in government savings. However, concerns remain that Eskom’s underlying operational issues, including inefficiencies, mismanagement, and ongoing load shedding, have yet to be fully addressed.
Personal Income Tax and Inflationary Bracket Creep
To compensate for lower-than-expected VAT revenue, personal income tax brackets will not be adjusted for inflation. This means that many taxpayers will experience bracket creep, effectively resulting in higher tax payments despite receiving inflation-linked salary increases.
Employees who receive salary increases in 2025 may find themselves in higher tax brackets, thereby facing increased tax liabilities. This adjustment is expected to generate R19.5 billion in additional revenue for the government when it took effect on 1 March 2025. Critics argue that this move unfairly burdens middle-class workers, who will now find it even harder to keep up with rising living costs.
Government Announces Increased Social Grant Allocations to Ease Cost-of-Living Pressures
Acknowledging the significant financial strain that many households continue to endure, the government has reaffirmed its commitment to providing relief through enhanced social grant allocations. The Finance Minister, Enoch Godongwana, emphasised that the administration is acutely aware of the challenges posed by rising living costs and, as a result, social grants will see increases that exceed the current inflation rate.
The Social Relief of Distress (SRD) Grant, which was initially introduced in 2020 as a temporary measure to support vulnerable citizens during the onset of the Covid-19 pandemic, remains a critical lifeline for millions. Despite its temporary status, the grant, which currently provides R370 per month to eligible recipients, continues to assist over 10 million individuals across the country. In a significant policy extension, the government has confirmed that the SRD grant, in its existing format, will be extended for an additional year, ensuring its availability until the end of March 2026. To support this extension, a total allocation of R35.2 billion has been earmarked.
The updated increases for various social grants are as follows:
| Grant Type | Previous Amount (R) | New Amount (R) | Increase (R) |
|---|---|---|---|
| Old Age Grant | 2,185 | 2,315 | 130 |
| War Veterans Grant | 2,205 | 2,335 | 130 |
| Disability Grant | 2,185 | 2,315 | 130 |
| Foster Care Grant | 1,180 | 1,250 | 70 |
| Care Dependency Grant | 2,185 | 2,315 | 130 |
| Child Support Grant | 530 | 560 | 30 |
| Grant-in-Aid | 530 | 560 | 30 |
These adjustments reflect the government’s ongoing efforts to support vulnerable populations amid economic challenges.
Public Sector Wage Adjustments and Early Retirement Programme
In line with its existing agreements with public sector unions, the government has reaffirmed its commitment to implementing a 5.5% salary increase for state employees in the 2025/26 financial year. Furthermore, in the subsequent two years, public sector wages will rise in alignment with the prevailing inflation rate. This agreement will require additional financial resources, with the following projected cost increases:
- An additional R7.3 billion allocated for 2025/26.
- A further R7.8 billion to be provided in 2026/27.
- An additional R8.2 billion budgeted for 2027/28.
Moreover, the government has set aside R11 billion over the next two fiscal years to fund an early retirement initiative. The primary goal of this initiative is to facilitate the transition of experienced senior personnel into retirement, thereby creating opportunities for younger professionals to enter the public service sector. This strategic move is expected to generate substantial financial savings, with projected annual savings averaging R7.1 billion over the medium to long term. These savings will be retained by individual departments to be utilised in a manner that aligns with their operational priorities.
Although the current wage agreement surpasses earlier projections outlined in both the 2024 Budget and the Medium-Term Budget Policy Statement (MTBPS), its structured duration provides greater certainty in budget planning. Additionally, the government has decided to uphold its commitment to offering early retirement packages for senior officials. However, a proposal put forward by the country’s largest labour federation, which sought to suspend contributions to the defined benefit pension fund for public sector employees, has been firmly rejected.
Increase in Excise Duties on Alcohol and Tobacco Products
In an effort to enhance revenue collection and promote responsible consumption, the government has announced an increase in excise duties on a range of alcoholic beverages, pipe tobacco, cigars, and vaping products. Effective from 1 April 2025, these changes will see:
- A 6.8% increase in excise duties on alcoholic beverages, including beer, wine, and spirits.
- A 6.8% rise in duties on pipe tobacco and cigars.
- A 4.8% increase in excise duties imposed on cigarettes and vaping products.
These adjustments form part of the government’s broader fiscal strategy aimed at maintaining public health priorities while ensuring sustainable tax revenue collection.
Fuel Levies to Remain Unchanged Amid Cost Relief Measures
In an effort to provide relief to motorists amid prevailing economic difficulties, the government has opted to keep the General Fuel Levy (GFL) unchanged for another year. This move extends to the Road Accident Fund (RAF) levy and the customs and excise levy, which will also remain frozen.
According to Finance Minister Godongwana, this decision will result in approximately R4 billion in tax relief for South African motorists, partially offsetting the effects of the proposed Value-Added Tax (VAT) increase. However, while some fuel-related taxes remain unchanged, others will see significant increases.
Notably, the carbon fuel levy will experience a substantial rise of more than 366%, starting in April 2025. This increase is in line with South Africa’s commitment to climate change mitigation through carbon taxation. The specific adjustments include:
- An increase in the carbon tax from R190 to R236 per tonne of carbon dioxide equivalent, effective from 1 January 2025.
- In accordance with the Carbon Tax Act of 2019, the carbon fuel levy will increase by 3 cents per litre from 2 April 2025.
- Following this adjustment, the total carbon fuel levy will amount to 14 cents per litre for petrol and 17 cents per litre for diesel.
These measures, while providing relief in some areas, reinforce the government’s commitment to reducing carbon emissions and aligning with global climate policies.
Fuel levies continue to play a major role in shaping both inflation and disposable income levels. Thankfully, the April 2025 Petrol and Diesel Price Update Brings Great News, offering some breathing room for consumers and businesses alike. This reprieve complements the budget’s efforts to stabilise living costs and revive economic momentum.
Conclusion
The 2025 budget reflects a government attempting to balance economic recovery with rising fiscal pressures, but many of its measures come with significant trade-offs. Tax increases, debt concerns, and slow growth projections indicate a difficult road ahead, especially for middle-class and lower-income households. While social grants and debt relief measures offer some respite, uncertainty remains over whether these policies will be enough to stimulate real economic progress. The effectiveness of these interventions will depend on how well the government manages implementation and whether meaningful structural reforms accompany these financial adjustments.
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