In a budget that mixed relief and restraint, finance minister Enoch Godongwana used a sudden revenue windfall to ease taxes on households and calmed markets by trimming the growth in debt service costs.
The package builds on the prudent fiscal consolidation and debt stabilisation strategy that has defined South Africa’s fiscal policy since 2018, when President Cyril Ramaphosa inherited a fiscus battered by rising deficits, soaring debt and a cascade of sovereign credit ratings.
For individuals, the budget delivers a long-delayed tax relief, adjusting income tax brackets for inflation and raising rebates and thresholds that will cost the fiscus at least R13.7bn.
The move marks a sharp U-turn from earlier warnings that tax increases of about R20bn would be needed to shore up the fiscus.
Stronger-than-expected revenue, which overshot by R28.3bn compared with the 2025 budget, and lower borrowing costs instead gave Treasury room to reverse course, offering relief while keeping the consolidation framework intact.
Economists broadly welcome the budget, saying Godongwana used the revenue overrun to reinforce fiscal discipline.
Ruen Naidu, a portfolio manager at Ninety One, said the budget is “constructive and conservative”, adding that it stabilises debt while keeping a lid on expenditure.
The rand and bonds firmed after Godongwana issued the budget in parliament, helped in part by a rally in PGM prices.
By Wednesday evening the rand had strengthened more than 1% before paring back gains to about 0.8% at R15.85 against the dollar. The yield on the blended 10-year government bond fell 10 basis points to 7.85%, a level last seen in 2015.
Elna Moolman, head of South Africa macroeconomic research at Standard Bank, said the budget’s commitment to fiscal consolidation is positive for bonds and credit ratings.
“However, South African government bonds have arguably already been discounting this fiscal improvement in recent months, after previously being unduly sceptical. Therefore, in our view, this budget doesn’t justify further bond gains,” she said.
Still, much of the consolidation path hinges on a modest improvement in economic growth and the successful execution of infrastructure plans.
The Treasury expects growth of 1.6% in 2026, rising to 2% by 2028, supported partly by a planned R1-trillion infrastructure investment over the next three years aimed at easing logistics bottlenecks, strengthening energy security and improving water services.
Of this, R577.4bn will be spent by state-owned companies and other public entities, R217.8bn by provinces, and R205.7bn by municipalities.
Political faultlines
The budget also exposed simmering political faultlines. The Treasury pushed back against the health department’s drive to phase out medical tax credits to help fund the National Health Insurance.
Instead, it upwardly adjusted medical tax credits for inflation for the first time since 2023 — a move framed as protecting low- and middle-income earners. In addition, Treasury is proposing that the eligibility net be expanded. The Treasury believes that big beneficiaries of the tax credits are low- and middle-income earners.
The budget did not create a new baseline allocation in the defence vote for expanded troop deployments, which Ramaphosa said in his state of the nation address would occur in gang-affected communities in Cape Town and in communities ravaged by illegal miners.
Godongwana confirmed in a media briefing before his budget speech in the National Assembly that the SANDF’s deployment costs will be financed through emergency funding mechanisms.
Ramaphosa also announced the recruitment of 5,500 police officers and the appointment of 10,000 labour inspectors.
Fiscal story
The budget demonstrated improvements over three years in projected fiscal metrics such as gross loan debt as a percentage of GDP, the gradual decline in the budget deficit and the promised achievement of a primary budget surplus (when revenue exceeds non-interest expenditure) of 0.9% of GDP in 2025/26 and 2.3% in 2028/29.
The minister said, “We have turned the corner” relative to where the fiscus was after the Covid-19 pandemic.
Director-general Duncan Pieterse said in his foreword to the Budget Review that the budget “marks an important turning point for South Africa. Determined action has put the country’s public finances on a sustainable footing, enhancing fiscal credibility.”
Gross loan debt stabilises at 78.9% of GDP in 2025/26 — for the first time since 2008. It is higher than the 77.9% forecast in the medium-term budget policy statement due to changes to the nominal GDP denominator and higher debt this year. But it declines faster than medium-term budget forecasts to 77.3% (77.7%) in 2026/27, 77% (77.4%) in 2027/28 and 76.5% (77%) in 2028/29.
Projected debt service costs are revised down by R10.6bn over the medium term due to improved bond yields, a stronger rand and lower inflation and interest rates.
Pieterse noted that by 2028/29 the debt stock would be R277bn lower than the medium-term budget projection, with R47.6bn of that stemming from the lower revaluation of the government’s inflation-linked bonds due to lower inflation and the inflation target, as well as enhanced fiscal credibility.
A consolidated budget deficit of 4.5% (4.7% in the medium-term budget) is expected for 2025/26 but is projected to be higher than medium-term budget forecasts for the next three years at 4% (3.8%) in 2026/27, 3.5% (3.3%) in 2027/28 and 3.1% (2.9%).
Head of the Treasury’s budget office Edgar Sishi said this is due to a deterioration in the balances of social security funds, provinces and public entities. The main budget balance declines progressively to 2.9% in 2028/29.
Higher net VAT, corporate income tax and dividend tax collections have contributed to the R21.3bn increase in gross tax revenue for 2025/26 compared with the 2025 budget. The withdrawal of the proposed R20bn tax increases results in a R57.2bn downward revision in gross tax revenue over the medium term.
Consolidated government expenditure is projected to increase at an average annual rate of 3.9% from R2.58-trillion in 2025/26 to R2.89-trillion in 2028/29, with capital payments showing the fastest growth of 9.7% over the medium term while the wage bill is forecast to grow by 4.4%.
Spending on education constitutes the largest share of spending at 23.2%. Consolidated non-interest expenditure increases at an annual average of 0.6% in real terms.
Buffers and trade-offs
The Treasury has identified R12bn in savings from cutting waste and reallocating programmes and set a R32.6bn contingency reserve for big shocks.
The social relief of distress grant at an unchanged payment of R370 for another year will cost R36.4bn, with Godongwana saying details of its replacement will be revealed in the next medium-term budget.
The Treasury also proposed a principle-based fiscal anchor to be fleshed out in the 2026 medium-term budget, requiring each incoming administration to table a medium-term plan to keep public finances sustainable.
Asked about political friction over the proposed fiscal anchor — the ANC has historically opposed it — Godongwana said it is subject to parliamentary processes and public consultation, with more details to come in November’s medium-term budget.
• Additional reporting by Business Day reporters
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