South Africa's 2025 budget: Navigating fiscal challenges amid political turmoil

Background to the unprecedented delays

Finance Minister Enoch Godongwana's 2025 budget has faced significant and unparalleled obstacles, leading to two prior failures to secure parliamentary approval and an impending third attempt now looming.

This situation is historically unique for South Africa, marking the first instance since the end of white-minority rule in 1994 that a national budget has not been delivered as scheduled.

The initial postponement in February 2025 directly resulted from sharp disagreements within the newly formed Government of National Unity (GNU). This fiscal uncertainty triggered negative market reactions, including a noticeable plummet in the South African currency against the US dollar.

The repeated failure to pass the budget underscores a fundamental challenge to the operational effectiveness of South Africa's newly formed coalition government.

This goes beyond a mere budgetary vote; it represents a critical test of the GNU's viability and its ability to forge consensus on national priorities. The budget, therefore, functions not merely as a fiscal document but as a crucial political battleground, reflecting underlying power struggles and deep ideological rifts among the governing partners.

The contentious VAT increase and its reversal

The central point of contention in the budget negotiations revolved around a proposed increase in the VAT rate. While initially floated as a jump from 15% to 17%, the final proposal involved a phased approach - 0.5% in May 2025 and another 0.5% in April 2026, targeting a total rate of 16%.

This move faced fierce opposition from across the political spectrum. Parties including the DA, EFF, MKP, and FF+, alongside labour unions such as COSATU and SAFTU, strongly criticised the VAT hike, labelling it regressive and harmful to low-income households.

Lobby groups added their voices, calling the tax "anti-poor" and ill-timed given rising living costs.

The DA, a key coalition partner, emphasised that it could not support a tax "that would break the back of our economy."

Faced with this resistance, the National Treasury confirmed the cancellation of the VAT hike on April 24th, 2025. Minister Godongwana followed by withdrawing the Appropriation Bill and Division of Revenue Bill, allowing room for expenditure adjustments.

While the move eased political tensions, it created a significant funding gap that now requires creative fiscal management.

Political dynamics and legal challenges

The VAT debate also gave rise to legal disputes. A joint challenge by the DA and EFF in the Western Cape High Court resulted in the suspension of the VAT hike and a judicial review of the fiscal framework.

This development not only reinforced the role of legal institutions in fiscal governance but also introduced new procedural dynamics into the budgetary cycle.

The GNU, formed after the ANC lost its majority in the 2024 elections, continues to wrestle with internal tensions.

Opposition parties have used the budget process to highlight their influence, particularly ahead of the 2026 local elections.

Public disputes over who deserves credit for blocking the VAT increase underscore the fragile nature of coalition politics in this new era.

The magnitude of the shortfall

The withdrawal of the VAT hike has left an estimated R75 billion hole in the budget over the medium term.

While the headline number remains significant, some institutions, like the Institute for Economic Justice (IEJ), argue the shortfall may be closer to R60 billion, with only R2.7 billion affecting the current fiscal year.

Regardless, the need for sustainable, politically acceptable alternatives remains pressing.

Options for plugging the gap

Taxation Measures

With VAT increases off the table, the Treasury is considering more subtle revenue generation methods. Chief among them is "bracket creep," the decision not to adjust income tax thresholds for inflation.

This is expected to bring in an additional R18 billion without formally raising rates. While less visible than a VAT increase, the impact is still felt by middle-income earners.

Economists note the limited scope for traditional tax hikes.

Nonetheless, ideas under consideration include restoring the corporate income tax rate to 28%, introducing a financial transactions tax, or implementing a luxury VAT. A net wealth tax also remains on the table, with the potential to raise between R70 and R160 billion.

Meanwhile, SARS is set to receive R8.5 billion in additional funding over the next three years, a move aimed at enhancing tax compliance.

COSATU, however, has urged the Treasury to accelerate this investment to improve collections on the estimated R800 billion in unpaid taxes.

Spending cuts and efficiency measures

On the expenditure side, the budget signals several cost-containment efforts. Proposed measures include:

• Capping goods and services budget growth at 3.5%, potentially saving R50 billion.
• Reorganising or dismantling certain training and development funds, such as SETAs and the National Skills Fund, with potential savings of R80 billion over three years.
• Scaling back small business funding, saving R9 billion, while redirecting support to proven private-sector partners.
• Reassessing the public sector wage bill, with a proposed 3.5% increase instead of 5.5%, and plans to revive early retirement incentives supported by R11 billion.
• Assigning a dedicated task team to find R40 billion in additional savings.

While these proposals are ambitious, execution remains a challenge. Organisations like BUSA caution that past spending reviews have yielded little action.

With 240 unimplemented reviews over the past decade, the gap between policy planning and follow-through is stark.

• Healthcare: Despite budget constraints, the government plans to allocate an additional R28.9 billion to the healthcare sector. This includes funding for expanded HIV treatment programs and improving public health infrastructure - a clear signal that frontline services remain a priority despite tough fiscal decisions.
• Construction and infrastructure: Public infrastructure remains a cornerstone of the budget, with R1 trillion earmarked over three years. Investments will focus on transport, energy, and water - sectors seen as crucial for long-term economic growth and job creation.
• Retail: Although the VAT hike has been scrapped, the initial proposal heightened uncertainty in the retail sector. Retailers remain cautious, wary of consumer sentiment and potential knock-on effects from other indirect tax measures like bracket creep.
• Mining: While not directly addressed in the budget, the sector could benefit from infrastructure improvements and broader macroeconomic stabilisation. Enhanced transport and energy capacity would particularly support mining logistics and output.

The budget saga has highlighted the evolving nature of South Africa’s political landscape. Deep fractures within the GNU, visible in both parliamentary debates and legal manoeuvres, reveal the growing complexity of coalition governance.

Smaller parties such as ActionSA have played influential roles, supporting the budget in return for specific policy concessions.

The outcome as the National Assembly prepares to vote on the revised budget will be pivotal. A successful passage could restore investor confidence and offer a platform for future credit rating improvements.

On the other hand, failure could delay essential spending, raise borrowing costs, and further test the GNU's resilience.