MTBPS shows marginal fiscal gains while debt costs weigh on outlook

Finance minister Enoch Godongwana tabled a medium-term budget policy statement (MTBPS) on Wednesday that reflects marginal improvements in the country’s fiscal position, driven by better-than-expected tax revenue.

But with debt-service costs still consuming a significant share of revenue and growth projections remaining muted, the Treasury faces a fragile balancing act heading into an election year.

The Treasury has revised its growth forecast for 2025 down to 1.2%, from 1.4% projected in the May budget — a downgrade of prior forecasts attributed to shrinking fixed investment and lower exports in the first half of the year.

Growth is expected to pick up modestly thereafter, reaching 1.5% in 2026, 1.8% in 2027, and 2.0% in 2028.

The budget incorporates the Treasury’s formal adoption of a 3% inflation target with a one percentage point tolerance band, which has implications for revenue, nominal GDP growth, and expenditure planning.

Revenue performance has been bolstered by stronger-than-expected corporate income tax and VAT collections. Spending was partially restrained by the delayed finalisation of the 2025 budget.

The revised fiscal framework shows that the government now expects to collect just over R2-trillion in gross tax revenue in 2025/26 — R19.7bn more than projected in the May budget. The overrun is largely due to stronger collections in personal income tax, corporate income tax and VAT.

The main budget deficit is now projected at 4.7% of GDP- a modest improvement on the 4.8% forecast in the May budget — while the primary surplus is expected to rise from R68.5bn in 2025/26 to R224bn by 2028/29.

A growing primary surplus supports the government’s efforts to stabilise debt and curb the rising cost of servicing it.

On the expenditure side, total spending for the year is now expected to grow 3.6%, now reaching R2.59-trillion in 2025/26 (slightly above the May estimate of R2.58-trillion), growing to to R2.88-trillion in 2028/29.

“The social wage constitutes about 60% of consolidated non-interest expenditure, while capital spending increases for infrastructure to support economic growth and service delivery,” the Treasury said.

“Programmes or projects that yield poor outcomes or duplicate other efforts will be phased out or scaled down. Over the medium term, significant efficiencies can be achieved.”

The public sector wage bill remains contained under a multi-year agreement that caps increases at the rate of inflation, which the Treasury now expects to average 4.1% over the medium term.

Despite the improved revenue performance, the Treasury has not announced any major new allocations to state-owned enterprises or the Covid-19 Social Relief of Distress (SRD) grant, which remains in place until March 2027, “while proposals are finalised to link the working-age population to skills development and employment programmes”.

The Treasury also announced a reformed municipal infrastructure grant “to address persistent underspending, misuse of funds and capacity constraints that hinder effective service delivery”.

Where municipalities have demonstrated sufficient capacity, funds will still be allocated directly. But in cases of repeated failures, project delivery will shift to intermediaries such as the Municipal Infrastructure Support Agent or the Development Bank of Southern Africa. A new incentive mechanism will reward municipalities that deliver high-quality infrastructure on time and within budget, with maintenance plans and climate resilience built into project design.

Debt-service costs remain elevated, with the cost of borrowing expected to reach R568.2bn in 2025/26 — R20bn less than in May. Over the next three years, the gross borrowing requirement will average R464.2bn or 5.4% of GDP.

The Treasury projects that gross loan debt will peak at 77.9% of GDP in 2025/26, slightly higher than expected, largely due to lower nominal GDP growth.

On the financing front, the environment has “steadily improved” in recent months, supported by “more favourable macroeconomic and financial conditions”, the Treasury noted.

While no additional drawdown from the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) is planned for this fiscal year, R31bn has been earmarked for release in 2026/27 to reduce borrowing.

Gross fixed capital formation (a measure of investment in infrastructure, buildings and equipment) declined by 3.1% in the first half of 2025, following a 3.9% contraction in 2024.

“Investment by the private sector and public corporations fell in response to global trade policy uncertainty and persistent bottlenecks in network industries,” Treasury said. “The outlook is expected to improve as growing public and private investment in transport and energy boosts the broader investment climate.”

With national elections on the horizon and political pressure for higher social spending likely to mount, the February 2026 Budget will need to strike an even more delicate balance between consolidation, reform, and delivery.