Medium-Term Budget Policy Statement key takeouts:

• GDP growth for 2025 has been revised down to 1.2%. A modest improvement is expected if policy reforms are implemented.
• Tax revenue exceeds budget by R19.7 billion, driven by strong VAT, corporate income, and dividends tax collections.
• Government spending rises for education, health, infrastructure. No new funds for SOEs but SRD grant extended to 2027.
• Budget deficit projected at 4.7% of GDP. Debt-to-GDP ratio remains above 77% for next three years.
• Inflation target set at 3%. Wage bill management and payroll reforms underway, but further policy reforms are needed.

This year’s Medium-Term Budget Policy Statement (MTBPS) was presented in a slightly more encouraging domestic economic environment, with a modest improvement in SA’s growth dynamic since the May 2025 National Budget. This was driven by the ongoing “sugar rush” from the strong two-pot cash withdrawals; five interest rate cuts by the South African Reserve Bank (SARB) since September 2024; relatively subdued inflation; favourable terms of trade; and the country’s removal from the Financial Action Task Force (FATF) grey list in October. This is partly reflected in the performance of the rand exchange rate as well as the domestic bond and equity markets.

There are, however, some key challenges that remain. For one, despite the upside surprise earlier in the year, the manufacturing sector is still struggling to reflect a positive change in momentum. It continues to face numerous challenges, including the noticeable deterioration of SA’s economic infrastructure, increased import penetration, the high cost of doing business, and significant business regulation. There is also a concern that the negative impact of President Trump’s 30% import tariff on South African goods will become more evident over the next few quarters.

Positively, there is an increased focused on using private/public partnerships to drive the country’s infrastructural renewal initiative. This, along with a possible increase in the effectiveness of government’s policy reform agenda, should encourage a steady uplift in GDP growth performance in 2026/2027.

A key question remains: will the expected improvement in economic activity be enough to kickstart a self-reinforcing economic cycle sustained by a more robust labour market?

For this to happen, it is critical that the GNU remains stable, and that government policy implementation demonstrates a higher degree of urgency. Sustained higher levels of confidence in the private sector are key to unlocking SA’s full growth potential.

Overall, the minister of finance reiterated government’s commitment to fiscal consolidation, a commitment that has become credible this year amid a moderate improvement in fiscal performance presented in this year’s MTBPS. Importantly, however, without a meaningful and sustained improvement in economic growth and job creation, SA’s better fiscal position is likely to remain fragile.

SA’s key economic parameters are likely to strengthen

The minister revised down the 2025 GDP forecast for SA from 1.4% to 1.2%, largely because National Treasury was too optimistic at the beginning of the year. It did not take into full account the negative impact of ongoing logistical constraints; heightened political uncertainty; weak consumer, business, and investor confidence; and ongoing global trade tensions. Positively, growth estimates for the next three years are a little more encouraging, with the economy expected to grow by 1.5% in 2026, before rising to 2% by 2028. While these growth estimates appear realistic and achievable, they highlight the lack of vibrancy in the economy. In fact, it remains SA’s most significant constraint, especially in terms of job creation as well as a broadening of the tax base. It is worth repeating that if government makes a concerted effort to implement the needed policy reforms, economic growth could exceed these estimates over the medium term.

Following a contraction of -3.9% last year, fixed investment growth is expected to improve but remain negative at -1% in 2025, supported by government’s ongoing infrastructural development initiative and the private sector’s electricity-related capital expenditure. Overall fixed investment spending remains hampered by global trade policy uncertainty and bottlenecks in logistics. Positively, National Treasury envisages fixed investment growth will rebound to 2.6% in 2026, before surging to 3.9% by 2028.

In terms of inflation, the minister of finance officially changed the country’s inflation target to 3% from the 3% to 6% target range (see discussion below). The MTBPS explicitly supported the SARB’s ability to achieve this new target by assuming that the average annual rate of increase in consumer prices will moderate, trending towards 3% over the medium term. CPI inflation is expected to slowly fall from an average of 4.4% in 2024 to an average of 3.2% by 2028.

Update on tax revenue collection

For the 2025/2026 fiscal year, government is expecting to collect R2.01 trillion in tax revenue, which is a modest but welcome R19.7 billion more than the budgeted tax revenue estimate presented in the May 2025 National Budget. This is the first time that government has had a tax overrun since 2022/2023 and it is largely in line with what was expected, given upbeat monthly tax revenue collection since April. The tax revenue-to-GDP ratio is expected to rise from 25.2% to 25.7%.

According to the MTBPS, the areas of tax that have led to the revenue overrun include VAT, corporate income tax (CIT), and dividends tax. VAT collection has been revised significantly higher, with an overrun of R11.3 billion, translating into a growth of 7.8% compared to the projected growth of 5.3% in the May 2025 National Budget. The improvement in VAT collection was driven by a strong rise in domestic VAT collection, along with a slower pay-out of VAT refunds by SARS.

CIT has also been revised higher and is now expected to grow by 7.7% compared to the projected growth of 6.3% in the May 2025 National Budget. In addition, dividends tax is also expected to be higher than previously estimated, growing by 7.8%. The upward revision to tax on corporate income and profits will translate into a combined windfall of R8.8 billion, amid strong collections from the trade, electricity and finance sectors and large once-off dividends tax collection from the mining and retail sectors. Interestingly, National Treasury did not consider the potential impact of higher selected commodity prices on mining profitability, suggesting possible further upside risk to CIT in 2025/26.

Over the medium term, government’s revenue expectations have been lowered by R15.7 billion relative to the 2025 Budget due to a weaker profitability outlook for corporates and lower wage growth for individuals (driven by lower inflation expectations). Collections are expected to come in at R2.14 trillion in 2026/2027 and R2.27 trillion in 2027/2028, representing annual increases of 6.9% and 5.9% for each year respectively, which is in excess of the projected nominal growth in GDP over the same period.

Importantly, without a sustained increase in economic growth, accompanied by an increase in employment and an improvement in tax morality, the government may struggle to meet its revenue targets. Without higher economic growth, tax collection will continue to dwindle, scuppering government’s attempts to meet its social economic objectives.

Update on government expenditure

According to the MTBPS, government’s budget non-interest expenditure will increase by R15.8 billion relative to the estimate presented at the time of the National Budget in May 2025. This is largely due to additional allocations to the provincial equitable share for spending on education, health and the impact of population changes. There has also been an increase in the contingency reserve to account for two freight rail rehabilitation projects in Transnet; capitalisation of the credit guarantee vehicle (for infrastructure projects); the rebuilding of parliament; Sentech dual illumination costs; and the 2026 municipal elections.

Interestingly, government did not propose any additional allocations to state-owned entities (SOEs). This is encouraging as it shows National Treasury continues to take a hardline approach towards SOEs, insisting that they restructure before additional funds are allocated. However, many SOEs remain in serious financial difficulty and will need government assistance sooner or later. By not making provisions for SOEs now, the minister is simply delaying the inevitable and pushing the problem down the road.

Importantly, the minister extended the Covid-19 Social Relief of Distress (SRD) grant by another year to March 2027, adding that this will give government time to finalise proposals to link the working-age population to skills development and employment programmes.

Lastly, the efficiency of government spending has deteriorated significantly over the past 15 years, with the Auditor General reporting significant wasteful and unauthorised expenditure in recent years. This, coupled with high levels of corruption, massively undermines the effectiveness of government services, negatively affecting confidence. It is very encouraging that the Minister of Finance is clearly endeavouring to adhere to fiscal discipline; finalising work on finding permanent fiscal anchors; higher levels of investment spending; and controlling growth in the public-sector wage bill.

SA’s fiscal deficit and government debt

Solid revenue collection and currency strength has allowed the Minister of Finance to present an ongoing improvement in SA’s key fiscal parameters. National Treasury is now projecting a budget deficit for 2025/2026 of 4.7% of GDP, which is down marginally from 4.8% at the time of the May 2025 National Budget. In addition, gross government debt has been revised down modestly by R20.5 billion in 2025/2026 relative to the 2025 Budget. The reduction in debt is more pronounced over the medium term, with National Treasury reducing its total borrowing requirement expectations by a substantial R56.5 in 2026/2027 relative to the 2025 May Budget Review, partly owing to government receiving an additional R31 billion from the GFECRA account.

Despite this, the country’s debt-to-GDP ratio has been revised up to 77.7% of GDP from 77.4% for 2025/2026, amid lower nominal GDP due to lower inflation. Overall, government maintains its commitment to debt stabilisation, with the ratio still peaking this year and trending lower in subsequent years. Unfortunately, government debt is projected to remain above 77% of GDP for the next three years, before moderating to around 76.1% of GDP in 2029. While debt service costs will be manageable over the medium term, they will rise to 22% of main budget revenue by 2028/2029.

The risks to government finances are, unfortunately, to the downside until the various initiatives to embed fiscal discipline and lift economic growth have been more fully achieved. Some of the risks to the fiscal outlook include a higher-than-projected wage bill over the medium term; higher borrowing costs; and persistently higher budget deficits from the ongoing need to bail out SOEs and fund the extension of the Covid-19 SRD grant.

Despite the risks and the upward revision to debt-to-GDP, credit ratings agencies are likely to respond positively to the MTBPS, acknowledging the ongoing commitment to fiscal consolidation amid an upward revision to tax revenue collection. This significantly increases the likelihood of an investment rating upgrade by S&P Global Ratings, which is scheduled to review the country’s credit assessment on Friday, 14 November 2025. The rating agency currently assesses SA’s long-term foreign debt at BB-, three notches below investment grade, with a positive outlook. Importantly, however, SA’s low economic growth environment, amid weak fixed investment and diminished policy effectiveness, could hamper chances of an upgrade. Ratings agencies may delay the decision to after the 2026 Budget Review.

Other policy commitments

Ahead of the MTBPS it was hoped that the minister would update and clarify a number of critical fiscal policy issues. Unfortunately, there are still several areas that he did not adequately address. These include progress on the implementation of the NHI, a longer-term decision on the continuation of the R370 a month special Covid-19 SRD grant, a formal policy proposal on a fiscal anchor, and progress on the restructuring of key SOEs.

Encouragingly, it was announced that National Treasury has officially changed SA’s inflation target, moving it from a 3% to 6% target band to a point target of 3%, with a 1% tolerance band on either side. This is a positive development for macroeconomic policy as it places SA’s monetary policy in line with its trading partners. In addition, if achieved, a lower inflation rate will support household consumption and private investment due to higher purchasing power, lower cost of capital, and a less volatile and better-performing exchange rate.

The decision does, however, have some unintended short-term consequences, especially for the fiscus. Lower inflation will not only slow nominal GDP growth, resulting in lower revenue growth and unfavourable debt-to-GDP outcomes, it will also slow the decline in the real value of public debt. Overall, the change in monetary policy will be applauded by financial markets, investors and credit ratings agencies, given the significant economic benefits.

Importantly, these benefits assume that the country can achieve a 3% inflation outcome on a sustained basis. Understandably, the credibility of SA’s monetary policy will be tested if a sustained 3% inflation rate cannot be achieved on a persistent basis. Over the past ten years, SA’s inflation has been inside the 3% to 6% target range 75% of the time, which has contributed significantly to the Reserve Bank’s current high level of policy credibility. The Reserve Bank has acknowledged the importance of clear and credible communication in anchoring inflation expectations and thus getting inflation lower. The finalisation of the target reform by National Treasury will go a long way towards doing this.

In addition, National Treasury continues to make good progress in managing the public sector wage bill. The wage bill as a share of consolidated spending has decreased from 35.4% in 2013/2014 to 31.8% in 2024/2025. Concerningly, however, National Treasury projects little to no additional progress in getting the wage bill lower over the medium term: it will rise marginally to 31.9% by 2028/2029. National Treasury provided an update on the early retirement without penalties programme, allocating R5.5 billion over the medium term. This will enable 15 000 eligible employees to exit public service in the next two years. Unfortunately, this is down from the 30 000 employees initially expected to take up the offer and only saves the government an average of R3.5 billion a year.

To further contain the wage bill, National Treasury has launched a process to remove ghost workers from the national and provincial payroll. Initial results have already flagged 8 854 individuals who were either receiving payments from multiple departments, were inactive employees, or had bank account anomalies. According to National Treasury, a two-month verification process will begin in January 2026 to rectify the issue of ghost workers.

The minister also gave an update on the Eskom debt relief for municipalities programme, stating that 24 municipalities have qualified for the first one-third debt write-off after 12 consecutive months of payment and 21 have generally maintained payments. Unfortunately, 47 municipalities remain in default amid weak collections, excessive electricity outages from lack of maintenance, and inadequate credit control. To address this, National Treasury has endorsed a plan to have defaulting municipalities transition to distribution agency agreements to help stabilise cashflows, improve payment and create a bridge to longer-term structural reforms to the local government fiscal framework. Under these agreements, Eskom will take over municipal electricity services for a certain period, support cost-reflective tariff setting, and assist with collections.

In 2016, Minister Pravin Gordhan made the point that “the quality of government spending needs to be improved. Too much public spending is regarded as wasteful, too much is ineffectively targeted and too little represents value for money”. Minister Gordhan stressed that “fiscal resources do not match long-term policy aspirations”. Since then, government’s policy aspirations have increased, while the fiscal resources have deteriorated, limiting government’s ability to close the gap between policy intention and enactment.

Positively, in this year’s MTBPS, the finance minister continued to focus on allocating money more appropriately. He emphasised the importance of infrastructure investment in lifting economic growth, driving employment creation and encouraging innovation. Given this, the focus on infrastructure expenditure continued in this year’s MTBPS, following a strong push in the May Budget. Government consolidated spending on building new as well as rehabilitating existing infrastructure will increase from R88.9 billion in 2024/2025 to R118.7 billion by 2028/2029. This includes roads, bridges, stormwater systems and public buildings. This makes spending on capital assets the fastest-growing item by economic classification. While this is not nearly enough to make a significant dent in the infrastructure shortfall that the country is facing, it is a step in the right direction.

Conclusion

Overall, despite low economic growth and a lack of job creation, government’s key fiscal parameters are being brought more fully under control. National Treasury remains committed to ensuring that the public sector maintains the improved level of fiscal discipline over the next few years. In addition, the minister of finance reiterated the importance of significantly increasing the extent to which the private sector is involved in funding infrastructure and providing technical expertise. This is to be applauded, given the challenging economic, social, and political environment, but it will be difficult to achieve without the necessary political backing and support.

The MTBPS was broadly in line with market expectations. In the short term, financial markets, especially the local bond market, are likely to be fairly pleased with the detail. In addition, it will be encouraging to international investors and credit rating agencies. This is partly because government announced an improved set of fiscal parameters, but also because the minister of finance strongly intends to push ahead with various critical fiscal reform measures. These are intended to both control the overall increase in government expenditure and increasingly alter the mix of spending away from consumption towards increased fixed investment activity.

Unfortunately, this positive view does not take account of three key concerns. Firstly, controlling the increase in social payments and wages over the next few years is going to remain challenging. Secondly, the projected increase in tax collection over the next three years might be difficult to achieve, given that economic growth is projected by National Treasury to only average 1.8% over the next three years. Lastly, there is a still a real risk that various SOEs will require additional government support over the coming years. The most concerning is Transnet.

Ultimately, there is no substitute for higher economic growth to resolve SA’s fiscal constraints. This can only be achieved through a concerted and co-ordinated effort to lift business and household confidence, improve private sector fixed investment, and enhance skills development and productivity. This is going to require a much greater effort in implementing and improving the effectiveness of key policy reforms. Without these reforms, private sector investment is likely to continue to stagnate, exacerbating the already high levels of unemployment and increasing the risk of social unrest.

STANLIB Asset Management Economics Team

November 2025