Inflation, and Budget 3.0

SA Inflation

SA Inflation this week came out higher than expected, increasing from 2,7% in March to 2,8% for April.  

Even at 2,8%, our inflation rate is still substantially lower than a year ago in April 2024 when it was 5,2%, representing a remarkable improvement over the last year, and well below the 3% SA Reserve Bank lower targeted band.  

Interestingly, at almost exactly the same time on Wednesday, the UK released their inflation data, where their inflation rate increased from 2,6% in March, to 3,5% in April, which was above the consensus estimate of 3,3%;

This means the UK now sees a higher inflation rate than SA, which last occurred during Covid19.

Inflation overall is heading lower as can be seen on the graphs, but this month does highlight the risk, although not probable, that we in SA could import some offshore inflation, where we in SA are a net importer of goods and services.  

South Africa’s Third 2025 Budget – A Credible, Market-Friendly Course Correction Amid Constraints

The Old Mutual Chief Economist, Johann Els, shares his thoughts on our Budget Speech presented earlier this week.

1. Budget Version 3.0:

Following two failed attempts, Finance Minister Enoch Godongwana has tabled a third—and likely final—Budget for 2025.

This version:

· Abandons the VAT rate increase.

· Implements spending cuts across several areas.

· Maintains bond issuance levels and contains the gross debt trajectory in nominal terms.

· Paints a more realistic macro picture, with lower GDP growth and higher debt-to-GDP ratios.

2. Fiscal Consolidation Remains the Anchor

Despite a tighter economic backdrop, the Budget reiterates its commitment to fiscal consolidation:

· Main budget deficit: -4.6% in 2025/26, narrowing to -3.2% by 2027/28.

· Primary surplus: +0.8% in 2025/26, rising to +2.1% by 2027/28.

· Debt-to-GDP: Now expected to peak at 77.4% in FY25/26 before a marginal decline. Nominal debt remains largely unchanged over the MTEF, but lower GDP forecasts lift the ratio.

3. Growth Forecasts Revised Down

· Treasury’s forecasts: 1.4% in 2025, 1.6% in 2026, 1.8% in 2027.

· Private sector view: These are likely optimistic; my revised forecast for 2025 is 1.5%, given weak Q1 performance and global headwinds.

4. Revenue Measures: Tax Hikes Deferred, Collections Optimised

· The VAT hike and zero-rating changes proposed in March were scrapped.

· Instead, inflation-linked fuel levy hikes (R$.01and no PIT bracket adjustments.

· Additional R20bn in new tax measures proposed for 2026/27 (details pending).

· Excise duties on alcohol and tobacco will rise above inflation.

· Revenue surprise: Shortfall vs Budget 2.0 is a manageable R62bn, while revenue is R75bn above MTBPS projections—mainly due to stronger-than-expected nominal GDP and more optimistic tax collection assumptions.

· SARS strengthening: Debt recovery potential of R20–R50bn/year; R4bn in new allocations to SARS to support this.

5. Spending Cuts and Reallocations

· Total expenditure over the MTEF is now R6.69 trillion.

· Additional spending lowered from R232.6bn to R180.1bn.

· Cuts focused on: infrastructure (-R14bn), social grants (-R6.5bn), frontline services (-R30bn), early retirements (-R5.5bn).

· Despite cuts, some capital and service delivery allocations remain, including Home Affairs and PRASA.

· A contingency reserve of R21.6bn has been maintained.

6. Reform Momentum Picking Up

· Treasury will redesign the budget process to close low-priority or underperforming programmes.

· Spending reviews have identified R37.5bn in potential savings.

· Payroll reform includes identifying ghost workers and other inefficiencies.

· Updates on these reforms are expected in the October 2025 MTBPS.

7. Debt Management Strategy Holds Firm

· No change to auction levels or bond issuance plans.

· Gross loan debt expected to rise from R5.69trn in 2024/25 to R6.82trn in 2027/28.

· Debt-service costs were lowered by R1.8bn compared to March projections, but they were still very high at R1.3trn over the MTEF.

· Borrowing needs fall in 2026/27 (to R434.3bn) before rising again in 2027/28.

· Risk: Market participants still expect debt-to-GDP to reach 80% without faster growth.

8. Market Impact: Muted Positives Amid Lingering Risks

· Reassuring for bond and equity markets due to policy stability, fiscal realism, and credible consolidation.

· However, investors remain cautious:

o Growth assumptions may be optimistic.

o Debt ratios are worsening in relative terms.

o Execution risks remain high.

Nonetheless, this version is more market-friendly than the previous two budgets and sits at the optimistic end of market expectations.

Financial Planner Comments on the Budget    

The increase in the fuel levy of 16 cents per litre for petrol and 15 cents for diesel to combat no VAT increase, by nature, is inflationary. However, we are due another drop in fuel prices next month of around 50 cents per litre, on the back of a stronger Rand and weaker international oil prices.

In other words, while an increase in fuel levies is inflationary, with lower fuel prices, it will hardly be noticeable.

In his press conference afterwards, the minister also said that, not having any inflationary increase here for the past three years, he was aiming to merely bring next year’s inflationary increase forward slightly. He also said he would aim not to increase this again in next year's budget.    

This increase in fuel levies is in line with the first Finance Minister, Trevor Manual’s approach, when introducing the theme of increasing indirect taxes, as opposed to direct taxes (which were now kept unchanged), over two decades ago.

The overall approach of increasing indirect taxes was adopted to widen the tax base, where many persons simply do not pay taxes.

This is done via VAT and fuel levies, which are the most obvious.  The intention of the Treasury over the years has simply been to widen the tax base.  

The VAT increase proposed this year was rejected, and lower international oil prices and a stronger Rand meant that the Treasury could revisit the fuel levies.   

To balance the books, investment markets wanted to see whether the National Treasury would borrow more or cut spending. Borrowing more would have been negative for investment markets and the Rand. The alternative of cutting expenditure and not borrowing more would be far more attractive.   

Firstly, the National Treasury was committed to balancing the books, which is positive. Next, the budget shortfall was covered by the commitment to see reduced spending and not increased borrowings, which was a positive message for investment markets.      

FRIDAY FOOD FOR THOUGHT