The 2025 medium-term budget policy statement marks a turning point in SA’s economic trajectory.
For many years the government consistently missed its fiscal targets, thereby damaging its credibility. The medium-term budget demonstrates the opposite: the government is running a primary budget surplus — revenue exceeds noninterest expenditure — for the third consecutive year. Globally, this is a foundation of fiscal sustainability.
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In addition, government debt will stabilise at 77.9% of GDP this year and decline thereafter.
Achieving these milestones, despite lower nominal GDP, underscores our commitment to restore fiscal credibility.
Fiscal sustainability translates into lower interest rates and reduces debt-service costs. Lower interest rates cut the cost of credit across the economy, driving higher levels of investment and household consumption — and therefore higher growth. Lower debt service costs mean the government spends less on paying debt and more on urgent social priorities and infrastructure — supporting the most vulnerable and driving higher growth.
Economic growth remains key to our prosperity. That is why this medium-term budget continues to shift spending from government consumption to growth-enhancing investment in public infrastructure. Capital expenditure is the fastest-growing expenditure item, at 7.5% a year over the medium term.
The government will issue infrastructure bonds this year and capitalise the new credit guarantee vehicle to enhance financing of infrastructure projects and derisk investment in transmission infrastructure by the private sector.
The allocation of R8.3bn to support the rehabilitation of Transnet’s railway infrastructure will unlock about R12.4bn in private sector funding and support export growth and fiscal revenues.
The medium-term budget also introduces the Metro Trading Services Reform to incentivise municipalities to invest in maintaining and modernising infrastructure and improve services. Municipalities experiencing persistent capacity and governance failures will no longer receive their infrastructure grant allocation directly. Instead, delivery will shift to an indirect model through institutions such as the Development Bank of Southern Africa.
Narrowing risk premium
Consistent fiscal discipline is already paying off, with sound monetary policy, which has lowered inflation and inflation expectations. In recent months the country risk premium has narrowed, and the rand has appreciated by 9.9% year to date, while 10-year bond yields have declined by 231 basis points from 11.1% at their recent peak in April to 8.8%.
Alignment between the National Treasury and the Reserve Bank on monetary policy, and continued delivery on fiscal targets, will underline the positive narrative and build macroeconomic credibility.
The inflation rate has averaged just 3.1% over the past 12 months. To reinforce this positive outcome, the government has decided to set a new inflation target of 3% that will anchor inflation at this level into the future. That will reduce the cost of living and lower borrowing costs for businesses, households and government, supporting higher rates of investment and growth.
This is the first change to the target since the government introduced inflation targeting to anchor monetary policy in 2000, when it set a target range of 3%-6%. The decision comes after careful consideration by the minister of finance, who is responsible for setting monetary policy in consultation with the Reserve Bank governor. It follows a joint research effort by the Treasury and the Bank to study the impact of a lower target on the economy and the fiscal framework.
While lower inflation will initially reduce nominal GDP and government revenue, we have concluded that the target can be implemented without compromising our fiscal objectives.
Over time, a lower target will decrease inflation and inflation expectations, creating space for permanently lower interest rates. A lower target also reduces the inflation risk premium that investors charge to lend to SA, making it cheaper for the government and businesses to borrow on the market.
Rebuilding trust
Building budget credibility is not just about the market, though. Even more important is public trust in the process. The contested 2025 budget process earlier this year delivered a broad consensus that we need to spend public money more efficiently and more effectively so that it enables better services and higher economic growth.
Major multiyear reforms are under way through the budget process to improve performance and value for money. The current budget cycle builds on the expenditure reviews that Treasury has conducted over many years. Under the Targeted and Responsible Spending (Tars) initiative, the government will identify and remove low-priority or underperforming programmes from the budget. Tars has recommended several programmes for closure or scaling down. Initial savings of R6.7bn have been included in the medium-term expenditure framework, and this will increase in subsequent budgets.
As part of rooting out corruption and inefficiency, the government has also launched an extensive data-driven audit of “ghost workers” and has begun to identify fictitious or inactive individuals on the government payroll, with almost 9,000 cases flagged so far. This will result in savings in future years.
This week, we launched the government’s first Procurement Payments Dashboard using data from the Basic Accounting System. The dashboard shows the payments made to suppliers by most national and provincial government departments and represents a huge step forward in procurement transparency.
The dashboard will help identify inefficiencies and anomalies and uncover opportunities for consolidation. Transparency will not in itself stop corruption or waste, but it is an important first step.
Trust must be earned, whether from the public or from the markets. We are working to earn it and to build the credibility that can help SA grow faster for the benefit of all.
Dr Pieterse, a UCT and Harvard graduate, is director-general of the National Treasury.
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