By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano.
Key highlights
As expected, Treasury has revised its growth forecast down to 1.4% for this year (from 1.9% previously), citing weaker-than-expected fourth-quarter 2024 GDP data, logistical constraints, heightened political uncertainty, elevated borrowing costs, and trade-related global headwinds. Economic growth is projected to rise to 1.6% in 2026 and 1.8% in 2027 (see Figure 1). Growth now averages 1.6% over the medium term, compared to 1.8% previously, and risks are skewed to the downside (see Appendix). Headline inflation is projected to decline to 3.7% this year, stabilising at 4.2% and 4.3% over the subsequent two years.
In addition to the two growth scenarios presented in the March 2025 Budget, Treasury has developed a third alternative scenario relative to the current baseline. This scenario assumes an escalation in US-China trade tensions, with US tariffs rising above 10% for some countries. Under this scenario, South Africa's economy is significantly affected by weaker global demand, falling commodity prices, and heightened financial market volatility. The resulting increase in risk premia, borrowing costs, and capital outflows limits fiscal space, with GDP growth 0.3 percentage points (ppts) and 0.4ppts lower than the baseline in 2025 and 2026, respectively.
Importantly, the core elements of government's fiscal framework remain unchanged. The strategy continues to focus on accelerating structural reforms, maintaining macroeconomic stability, strengthening infrastructure investment, and building a capable state.
Despite spending adjustments, infrastructure and the social wage remain supported
Infrastructure investment over the 2025 Medium-Term Expenditure Framework (MTEF) is maintained at R1.03 trillion. This largely comprises R402.0 billion for transport and logistics, R219.2 billion for energy to strengthen the electricity-supply network from generation through to transmission and distribution, and R156.3 billion for water and sanitation to expand water resources and service infrastructure, including dams and bulk infrastructure to support mines, factories and farms (see Figure 2).
An additional R33.7 billion has been allocated to infrastructure over the 2025 MTEF, although this reflects a R12.9 billion downward revision relative to the March 2025 Budget. This downward revision includes the R4.0 billion removal of disaster management allocations and a reduction of approximately R6.9 billion to the Passenger Rail Agency of South Africa (PRASA). Nonetheless, the R33.7 billion in additional infrastructure spending is largely directed towards Budget Facility for Infrastructure (BFI) Window 8 projects (35%), PRASA (36.5%), and turnaround strategies for revenue-generating services (19.1%) such as water, electricity and solid waste in metropolitan areas.
Other spending adjustments include a R5.5 billion reduction in early retirement cost allocations, a R6.6 billion reduction in above-inflation increases to social grants, and a nearly R30 billion reduction in provisional allocations for frontline services. As anticipated, spending is maintained on the 2025 public-service wage agreement and its carry-through costs, as well as the Covid-19 Social Relief of Distress (SRD) grant.
Overall, additions to non-interest spending amount to R180.1 billion over the 2025 MTEF, which is lower than the R232.6 billion outlined in the March 2025 Budget. However, given revenue pressures from the withdrawal of the VAT rate increase and weaker economic growth, non-interest expenditure is reduced by R67.6 billion (when accounting for reduction in provisional allocations) relative to the March 2025 Budget. Despite this, spending on the social wage remains protected, growing by 4.9% over the 2025 MTEF and averaging 61% of non-interest expenditure. Within the components of the social wage, spending on employment programmes is projected to grow by 7.1% over the MTEF period, increasing from R19.1 billion in 2024/25 to R23.5 billion in 2027/28.
As outlined in the March 2025 Budget, this budget continues to emphasise the importance of infrastructure reform and investment in key areas-namely energy, rail, ports, water, and transport-as a foundation for medium-term economic growth.
The following reforms are being implemented:
Budget Review - Market implications
Relative to the March iteration of the budget, this new framework was neutral from a market perspective.
For equities, the withdrawal of the VAT hike will be positive for consumption, despite the removal of the expanded zero rating on certain goods, higher sin taxes, and an increase in the general fuel levy (perhaps opportune given lower energy prices currently). The social wage will be adjusted for inflation. Pro-growth measures including a focus on employment and infrastructure investment will remain in place. Possible further tax increases may be introduced in 2026, but this could be countered by better-than-expected revenue collection, with SARS receiving a specific budget allocation to improve tax efficiency.
For bonds, as expected, projected tax revenue is now lower due to lower vat increases, and lower than previously expected growth. Most of the shortfall is being reduced by cutting non-interest expenditure. There will be some fiscal slippage, but importantly treasury maintains a disciplined fiscal framework - targeting primary surpluses for the rest of the decade. Additionally, the peak in the debt-to- GDP ratio is still anticipated to occur this year. This will be positive from a credit perspective.
The rand weakened slightly relative to the US dollar during the delivery of the budget but remained below the R18.00 market versus the greenback. The 10-year bond yield also traded in a tight range - falling from just under 10.46% prior to the budget being tabled to 10.42% before moving back to about 10.44%. The JSE traded sideways with SA Inc industrials remaining supported at higher levels while Financials stocks strengthened slightly. .
