Strong commitment to fiscal consolidation remans – and that is crucial

There remains a strong commitment to fiscal consolidation, which is crucial. The debt-to-GDP ratio is still peaking this year but is expected to trend lower thereafter. The primary surplus in this budget appears larger than what would have been proposed in the cancelled February 19 tabling.

There is also a continued "tough love" stance for state-owned enterprises (SOEs), with no additional funding allocated to them.

Regarding VAT, the initially proposal of a 2% VAT rate increase has now been revised down to 1%, spread over two years—0.5% from May 2025 and another 0.5% in April 2026. The revenue shortfall from this adjustment will be offset by the decision not to implement bracket adjustments for personal income tax

Additionally, the previously proposed increases in social grants, which were significantly above inflation in the February 19 proposals, have been revised much lower. There is also continued zero-rating, in line with earlier proposals.

However, it is important to note that the budget has not yet been approved by the Government of National Unity (GNU). It is expected to take approximately two weeks for deliberation and approval. If approved, it should be very positive for financial markets, with the key takeaway being the ongoing commitment to fiscal consolidation and a declining debt-to-GDP ratio after this year

Commentary by Johann Els, Chief Economist at Old Mutual Group

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Back to Parliament to make compromises

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.

Commentary by Izak Odendaal, Chief Investment Strategist at Old Mutual Wealth

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Still lots of opportunities for people and their investments in the budget

There has been significant discussions and speculation regarding a potential Wealth Tax. In the comprehensive Budget Speech review document, the Standing Committee on Finance recommended addressing revenue shortfalls projected at R22.3 billion for 2024/25 by exploring progressive tax options, including taxes on luxury items and wealth taxes.

On this front, the SARS Commissioner’s wishes have been granted, with SARS receiving an allocation of R3.5 billion in the current financial year and an additional R4 billion over the medium term. This funding will support SARS in collecting and analysing wealth-related data through its High-Net-Worth Individuals Unit. However, it is important to note that no final decision has been made regarding the implementation of wealth taxes in South Africa. This remains an area we will closely monitor.

How does the Budget Speech impact your investments?

Firstly, due to lower-than-expected VAT increases, we did not see personal income tax tables, rebates, and medical tax credits adjusted in line with inflation. This measure helped the government raise an additional R28 billion in taxes.

On a more positive note:

·        There was no increase in the fuel levy this year.

·        The monetary thresholds for transfer duties have been adjusted by 10% to account for inflation. This means that property transfers up to R1.21 million are now tax-free, up from R1.1 million previously.

Interest exemptions for natural persons remain unchanged, as do dividend tax rates and capital gains tax rates.

How can you still save on tax?

Retirement annuities (RAs) and retirement funds remain effective tools for reducing your income tax liability. Tax deductions are allowed for contributions of up to 27.5% of the greater of remuneration or taxable income, capped at R350 000 per year. These assets also remain exempt from Estate Duty, unless you have disallowed contributions.

For example, if your income is R50 000 per month, your usual income tax liability would be approximately R11 300 based on the latest tax tables. However, if you contribute R5 000 per month to a retirement annuity, your tax liability would reduce to R9 500, resulting in a tax saving of around R1 800 per month.

The Tax-Free Investment annual contribution limit remains unchanged at R36 000 per year, with the lifetime limit still set at R500 000.

Why does this matter?

Given the tax benefits associated with retirement funds and tax-free investments, it may be worthwhile to consider additional contributions to retirement funds. Additionally, investing your SARS tax refund into liquid investments such as a tax-free investment account or discretionary investments like unit trusts can enhance your financial position.

The Two-Pot Retirement System

The government has started discussions on potential measures that may allow access to the retirement component of the two-pot system in cases where individuals have been retrenched and are in financial distress. However, strict conditions will apply, and we await further clarification on these parameters.

Commentary by Tiaan Herselman, Head of Advice and Proposition at Old Mutual Wealth

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Tough Love for SOEs Continues

Although always unlikely, the fact that the big investor concerns such as significant NHI funding, expanded social relief grants, SOE or municipal bailouts were not there, is good.

On the positive side, the projected budget deficit numbers and the forecast for debt peaking sooner than previously anticipated is good for local bonds as well as the local currency. Furthermore, this budget confirmed that the days of easy funding for SOEs are firmly behind us, and Treasury will be implementing a much tougher stance on any SOE support.

Public infrastructure spending over the next three years is forecast to be over a trillion rand, with most of that directed towards transportation and logistics. To the extent that this is implemented, this will be supportive of markets.

A major concern, however, is the potential expansion of the social relief of distress grant. Additional risk remains that the budget is not adopted in its current form, due to the inclusion of the much-opposed VAT increase. Notwithstanding those risks, it was a budget that was consistent with the government’s recent focus on fiscal consolidation and balancing economic growth (infrastructure investment) and added social support.

Commentary by Victor Mupunga, Head of Research at Private Clients by Old Mutual Wealth

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A lot of the bad news already been priced into bonds

With low economic growth at just 1.9% in 2022, 0.6% in 2023, and a projected 0.7% for 2024, retirement investors seem sceptical about whether they will be able to achieve sufficient returns in South Africa to be able to save for a comfortable retirement.

With a constrained fiscus and ballooning government debt to GDP, there are valid concerns that the taxation burden on income earners will keep rising.  However, the performance of our markets in 2024 after the formation of the GNU is cause for optimism, with returns from both SA Equities and Bonds well ahead of inflation. The potential for economic reform and public-private partnerships are positive for those who choose to see our economic prospects as a glass half full.

Many South Africans are struggling to secure their financial future. The reality is that government alone cannot ensure wealth creation or provide secure retirement from tax revenue. Today, less than 10% of working South Africans are on track to retire comfortably. This highlights the need for individuals to take proactive steps towards securing their financial futures.

On of the key considerations is the level of inflation. Inflation is expected to remain below the SARB’s 4.5% target allowing for further rate cuts. However, concerns remain about the potential impact of global tariff increases on global inflation and the U.S. threat to cut aid and terminate AGOA, which will pressure South Africa to find alternative markets and funding sources.

The options to increase revenue through increased taxes is fairly limited. Increasing wealth or corporate taxes is not a sustainable solution. Such measures may lead investors to externalise their wealth or exit the market entirely, thereby exacerbating our economic challenges. A more viable and welcome approach to increasing revenue is the proposed infrastructure bonds. This strategy not only benefits investors but also stimulates economic growth and development, aligning with the priorities outlined in the 2025 Budget speech.

Taking on additional debt is also not a feasible solution as the costs of borrowing are already too high.

The increase in VAT does raise some concerns around the fiscal health. The laffer curve means that as you increase taxes, revenue does not increase proportionally. The poor are hit hardest with a VAT increase but will be somewhat shielded by increases in the number of zero-rated goods.

Having said that, a lot of the bad news has already been priced into bonds and long-term yields if held to maturity still have value relative to other emerging economies.

Commentary by Kim Rassou, Head of Old Mutual Multi-Managers

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Back to Parliament to make compromises

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.

Commentary by Izak Odendaal, Chief Investment Strategist at Old Mutual Wealth