GNU's strategic pivot balancing growth with fiscal responsibility

Source: Flickr/GovernmentZA; SA Finance Minister, Enoch Godongwana.

This was especially true when it came to meeting the needs of poor households, who had initially been promised an expansion of the zero-rated basket—a list of essential items not subject to VAT, such as basic foodstuffs—to shield them from the impact of a VAT increase.

However, the government later scrapped the plan after U-turning on its decision to implement a VAT hike on 12 March 2025.

“The proposed increase to Value Added Tax (VAT) created so much debate—a vital debate, no doubt, but one that also created some uncertainty given the difficult trade-offs needed to balance fiscal sustainability while addressing our developmental goals,” Finance minister Enoch Godongwana says.

He was speaking on Wednesday, 21 May 2025, during his third attempt to deliver the national budget. His two prior efforts were derailed by disagreements within the Government of National Unity (GNU) over proposed tax increases.

He laid the issue to bed once and for all: VAT remains unchanged at 15%.

Economy

VAT to remain at 15% as government withdraws 1 May increase

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A redistributive framework

However, amid political and legal challenges, and in spite of the government facing limits on its funding options as a result, the 2025/26 Budget has made a strong comeback, designed to support economic activity and boost future growth prospects.

Its focus? A redistributive framework, which sees 61% of non-interest government spending allocated to the social wage, that will fund essential services, grants and critical infrastructure.

To this end, the government has invested over R1tn in infrastructure to boost economic prospects and expand access to basic services.

"This, all the while promoting fiscal sustainability, so future generations are not burdened by the decisions we make today," Godongwana adds.

#Budget2025 | The provincial education sector baseline over the 2025 MTEF is R1.04 trillion, and R9.5 billion will be added over the medium term to keep teachers in classrooms and hire more staff.

An additional R10 billion has been added to the baseline as announced during the… pic.twitter.com/ye15KPOOhk

— South African Government (@GovernmentZA) May 21, 2025

Smart fiscal strategy

In a media statement, North-West University Business School economist, Raymond Parsons, praises the overarching framework.

"If fully implemented, the strong emphasis on infrastructural development bodes well for the 3% GDP growth in the medium term envisaged by the Government of National Unity (GNU).

“The latest Budget has therefore provided a combined policy and project foundation on which to build SA’s fiscal sustainability over the longer term.”

To strike the necessary fiscal balance, Godongwana outlined a three-pronged approach that includes reprioritising spending, enhancing efficiency, and increasing revenue.

The measures include:

Reducing additional spending over the medium term by R68bn

By releasing funds that had been set aside as provisional allocations for possible future use, but which had not yet been formally committed to specific government departments or programmes.

"Simply put, this means baseline allocations across all spheres of government remain largely unchanged. Instead, the size of the proposed increases to allocations is reduced, in line with what we can afford," Godongwana says.

Increasing revenue

To protect and bolster frontline services, while expanding infrastructure investments to drive economic activity, government has proposed an inflation-linked increase to the general fuel levy - the only new tax proposal for the 2025/26 fiscal year - and the first fuel-levy increase in three years.

As a result from Wednesday, 4 June this year, the general fuel levy will increase by 16 cents per litre for petrol, and by 15 cents per litre for diesel.

To further close the fiscal gap over the medium term, the 2026 Budget also allocated an additional R7.5bn over the Medium-Term Expenditure Framework, to increase the effectiveness of the South African Revenue Service (Sars) in collecting more revenue. Part of this allocation will be used to raise R20bn, which will cover debts owed to the fiscus.

Commenting on this in his media statement on the budget, Parsons highlighted the importance of participation by both the State and private sector in advancing economic reform and public infrastructure delivery.

“Both the role of Operation Vulindlela and the participation of private-sector investment remain indispensable to the successful delivery of key infrastructural outcomes, especially in transport, logistics, energy and water,” he says.

Improving efficiency

The National Treasury reviewed over R300bn in spending since 2013, identifying R37.5bn in potential savings. To this end, underperforming programmes will be closed, and reforms will enhance infrastructure planning and payroll oversight. A data-driven system will replace costly censuses and reduce regulatory burdens on businesses.

Growth, stability, hope

Parsons describes the 2025/26 Budget as a pivotal political milestone: “The good news is that this is now a GNU Budget, which is not only a plus for political stability, but should also ensure its subsequent passage through the various Parliamentary processes.”

He cautions, however, that growth assumptions may be optimistic: “While the original assumption of 1.9% GDP growth this year has been reduced to 1.4%, this recognises the new global and domestic economic realities shaping SA’s growth prospects.

“The more conservative Treasury projection simply confirms why the third budget needed to be strongly growth-dominated. If SA wants to grow its tax base to enlarge its fiscal space, it needs a rapidly expanding economy in which job creation accelerates.”

Gondongwana followed on from this, saying the Budget is structured in a way to deliver on the hope for a better life and a better future for South Africans.

"It is an attempt to meet our shared goals of redistribution, redress and structural transformation," he said.

"We are not there yet. But I believe there is consensus in this House and around the country that this is the destination we need to strive for."