By Nazrien Kader, Old Mutual Group Head of Tax

All eyes are firmly fixed on the Honourable Finance Minister Finance Enoch Godongwana as he prepares to deliver his 2025/26 Budget presentation on Wednesday, 19 February 2025.  With South Africa desperate for economic growth to help address the critical unemployment challenge in the country and the ever increasing debt burden, balancing the budget is becoming an extreme sport -  progressively more difficult each year with less and less wriggle room for the Minister as he tries to walk the tight rope of juggling the expenditure demands, with revenue collections projected to undershoot the 2024 budget estimates by R22.3 billion. To add fuel to the fire, heightened geopolitical tensions pose a peculiar problem relatively unheard of in the last 3 decades post-democracy. South Africa finds itself deep in the crosshairs with none other than the newly inaugurated President of the United States of America, South Africa’s second largest export destination.

Citizens breathed easier in the recent past as inflation eased, interest rates commenced the downward trend, electricity supply improved on the whole and our logistics networks showed shoots of improvement. Governments commitment to stamp out corruption tackling the ‘construction mafia’ for starters, gave confidence that Government is not afraid to deal with our obvious problems. A marked increase in SARS enforcement efforts saw the National Prosecuting Authority prosecuting 85 cases brought by SARS, of which 81 concluded with a positive outcome for SARS. According to the latest SARS Annual Report, syndicated tax and customs crime interventions yielded R20.2 billion in revenue recovery. SARS lack of hesitation to litigate resulted in 119 judgements handed down by the tax courts of which 102 cases were in favour of SARS, representing an 86% litigation success rate.

International Economic Landscape

Internationally inflation has being slowly coming under control and we have seen the promise of interest rate cuts take effect. The latest OECD economic outlook projects global GDP growth of 3.3% in 2025 up from 3.2% in 2024. Inflation is expected to ease from 5.4% in 2024 to 3.8% in 2025. The joker in the pack remains President Trump and his “America First” policies. We have seen the first salvo in a potential trade war with the US imposing tariffs on Canada, Mexico and China. Whilst the imposing of tariffs on Canada and Mexico have been temporary delayed, President Trump has been vocal in threatening additional tariffs against a range of other countries including South Africa.

SA Economic outlook

Improved confidence in arguably Africa’s most industrialised, technologically advanced and diversified economy following the formation of the Government of National Unity (GNU) in June 2024, is yet to be reflected in actual GDP growth. With a threat of a costly ‘modern’ trade war looming, the impact on world economic growth and South Africa in particular continues to occupy dinner table conversations. The question is whether South Africa would be in a position to retaliate should President Trump elect not to renew South Africa’s participation in the Africa Growth and Opportunity Act which comes up for renewal later this year. This following the executive order suspending all aid to South Africa seen as a precursor to trade relations. One would imagine that sanity would prevail and alliances would be built not broken to strengthen co-operation and stability in the world order for long term economic prosperity.

GDP Growth Projections

In its January 2025 Monetary Policy Committee meeting, the South African Reserve Bank projected that the final outcome for GDP growth for 2024 is expected to be 0.7%, with growth projected of 1.8% for 2025 (a slight increase from the previous projection of 1.7%) and 2026. The Governor of the South African Reserve Bank Lesetja Kganyago was more bullish in an interview at the World Economic Forum annual meeting in Davos where he predicted that the economic growth for 2025 would be closer to 2%!  

In what can be described as scathing criticism, the IMF in its Article IV Report on South Africa published in January 2025 noted that South Africa has one of the world’s most restrictive business environments, citing burdensome and costly Government regulations. The IMF calculated that South Africa could add 1.8% to its annual economic growth rate over the medium term with a structural reform package focused on its labour market which the IMF believes would have wider impact than tackling the immediate electricity and logistic crises.

In his State of the Nation address on 06 February 2025, President Cyril Ramaphosa touted Government’s plans for significant infrastructure expenditure (R940 billion over the next three years) as the cornerstone in South Africa’s economic recovery plan, alluding to the initiation of a second wave of reform, to unleash more rapid and inclusive growth. What that means is unclear.

Whilst National Treasury has projected that the national debt as a percentage of GDP would stabilise in the 2025/26 fiscal year and reduce thereafter, the IMF has warned that public debt will likely continue to rise under its baseline scenario and has recommended more ambitious than envisaged fiscal consolidation.

Expenditure Outlook

Despite a projected shortfall in revenue collections published in the Medium-Term Budget Policy Statement in October 2024, the Minister announced upward adjustments to the expenditure ceiling by R16.8 billion per year in 2025/26 and 2026/27. Unfortunately, most of this increase is due to a repayment of SANRAL debt arising from the disastrous Gauteng Freeway Improvement Project (so called e-tolls) and early retirement costs for Government employees. The likelihood of an above inflation public sector wage settlement will continue to put pressure on the expenditure outlook going forward. The 2025/26 budget will be closely monitored by analysts to determine if Minister Godongwana can hold the line and keep expenditure in check.

Tax Collections

Whilst tax collections from individuals continued its upward trend increasing by 13.2% for the fiscal year to December 2024 (compared to December 2023), corporate income tax and VAT have been relatively flat with corporate income tax reflecting a reduction of 0.4% while VAT collections presented an increase of just 1.2%. Overall, this is the primary reason for National Treasury projecting an undershoot of 2024 budget estimates by R22.3 billion in 2024/25.

Tax Increases?

It is unlikely that National Treasury will introduce any new taxes. Existing taxes are likely to be tinkered with.  The usual lower than inflationary adjustments to the individual tax brackets can be more or less guaranteed. Whilst speculation is rife that the Minister may move to eliminate or reduce the medical aid tax credits, we expect status quo until the implementation of National Health Insurance. In an address to members of Parliament last year, National Treasury confirmed that it is exploring the feasibility of a wealth tax. The debate endures with advocacy groups pushing for early implementation and economist cautioning that adding another layer of tax on wealth could risk driving wealthy taxpayers out of the tax net through emigration and (legal) tax planning strategies. We expect National Treasury to tinker with existing ‘wealth taxes’ in the current regime such as donations tax (currently 25%), estate duty  (dual rate of 20% on the first R30m and 25% thereafter) and the capital gains tax inclusion rate for individuals (currently 40%).

From a corporate tax perspective, no changes are expected other than the further removal of tax incentives in line with National Treasury’s stated aim of simplifying the tax system. Whilst the VAT rate is expected to remain the same, the expectation is that further food items would be added to the basket of zero-rated goods and services. On the cards is finalisation of policies by the Department of Transport that would seek to integrate popular Airbnb and similar platforms, into the mainstream tourism industry, which could include the payment of hospitality taxes.

In his State of the Nation address the President made reference to setting up a Transformation Fund worth R20 billion a year over the next 5 years to fund black-owned and small business enterprises.  The Minister of Trade, Industry and Competition has previously stated that the fund is not about imposing new obligations but would rather aggregate resources from existing Enterprise and Supplier Development obligations. It is likely that a new BEE levy would be imposed to fund this new Transformation Fund. In setting up the fund, we urge Government to give due consideration by way of credits for existing expenditure on Enterprise and Supplier Development programmes implemented by business. If business is simply required to redirect the funds to a BEE levy, this could contribute towards the collapse of black economic empowered business and small enterprises that form part of the current Enterprise and Supplier Development Programmes which could on a worst case scenario lead to large scale closure of these businesses with consequential job losses.

Grey Listing

With three items of the Financial Action Task Force (FATF) outstanding, some commentators have expressed doubt that South Africa’s removal from the dreaded FATF grey list by early 2025, will materialise. On a best-case it is anticipated that South Africa could exit the FATF grey list in the second half of 2025.

SARS Continuous Improvement Strategy

Commissioner for SARS Edward Kieswetter, in the latest SARS 2023/24 Annual Report, enunciated that SARS continues to make significant progress in shaping the organisation to improve its effectiveness and efficiency to deliver on its legislative mandate. In addition, that SARS has substantially implemented the recommendations of the Nugent Commission of Inquiry. Of significance is that as part of its SMART Digital Tax and Customers Administration Platform, SARS continues to build on its existing work to harness the transformative power of technology, data science and AI in tax administration.

As an ‘armchair’ observer of the National Budget, I could be forgiven for describing Minister Godongwana’s 2025/26 Budget as an extreme sport, not for the fainted hearted with its anticipated thrills and spills more inclined towards so-called ‘adrenalin junkies’ that feed of adventure of the fiscal kind.