Key takeout points:

· Fiscal consolidation on track: Deficit narrowing to 2028/2029, while primary surplus is maintained.

· Revenue outperformance: 2025/2026 tax revenue beat forecasts by R21.3bn, easing pressure for tax hikes.

· Limited tax relief, no shocks: R13.7bn relief via bracket creep adjustments, higher medical credits and a R46 000 TFSA limit.

· Tight spending control: Expenditure growth capped at 3.5%, with R12bn reprioritised through TARS to fund priorities.

· Debt stabilising: Debt at 78.9% of GDP, with slower growth in debt-service costs despite elevated levels.

Understandably, these and other growth initiatives will take time to translate into sustainable higher economic growth. Consequently, SA’s growth rate is forecast to improve only modestly in 2026 and 2027 to a range of around 1.6% to 2%. However, the ongoing implementation of the key policy reforms should be combined to lift the growth rate to above 3% over the next 3-5 years.

The 2026/2027 Budget numbers

For the 2026/2027 fiscal year, the Minister of Finance announced that the budget balance is projected to improve to -4% of GDP, down from a revised -4.5% of GDP in 2025/2026 (revised from -4.8% of GDP in the 2025 National Budget). In 2027/2028 the fiscal deficit is expected to continue to improve, dropping to -3.5% of GDP, before reaching an acceptable 3.1% of GDP in 2028/2029. The latest outlook for the fiscal balance confirms that the Minister intends to adhere to fiscal discipline over the medium term, although he acknowledged that it would still take several years before the level of government debt is at a comfortable and sustainable level.

The Minister also highlighted that the primary balance is expected to remain in surplus during the current fiscal year (the primary balance is calculated as the budget deficit less interest costs) at 0.9% of GDP; and then the surplus will grow for the foreseeable future. This is a key metric used by the credit rating agencies to gauge the underlying level of fiscal discipline in the National Budget. It has been chosen by National Treasury as the anchor to stabilise public debt.

The projected improvement in economic growth over the next three years will, hopefully, make it easier for government to achieve its budget parameters and deliver an improved level of fiscal consolidation. Unfortunately, in prior years, government persistently aimed to reduce the budget deficit to below -4% of GDP on a sustained basis but was unable to meet this target, largely because of weak economic growth and an inability to rein in government expenditure, especially consumption spending and salary expenses.

In that regard, investors need to be mindful of two risks.

• The first is that government’s revenue projections might be difficult to achieve in a low growth environment, and

• the second is that government has budgeted for a modest increase in expenditure over the next three years.

This will be challenging to maintain, given the ongoing need to assist some State-Owned Enterprises (SOEs), the demands to increase social payments, sustained upward pressure on government wages and the high debt service costs.

Given the current balance sheet constraints in central government as well as the SOE sector, economic policy will have to increasingly focus on the role of the private sector in driving economic growth. It is envisaged that this will include a greater reliance on private-public partnerships as a means of lifting fixed investment spending – which has improved over the past 12 months. National Treasury envisages that fixed investment spending will grow by 2.4% in 2026, improving to 3.3% in 2027 before stabilising at 3.9% in 2028. Achieving or even exceeding these growth projections would put SA in a far better position to sustain a higher rate of GDP growth.

Update on tax revenue collection

In 2025/2026, tax revenue outperformed budget by R21.3 billion. This means that total revenue increased by 8.2% year-on-year, above last year’s budgeted increase of 7%. Fortunately, this outperformance was slightly better than the R19.7 billion revenue overrun the Minister of Finance projected at the time of the November 2025 Medium-Term Budget Policy Statement (MTBPS).

VAT collection

A breakdown of 2025/2026 tax revenue highlights that the main categories that contributed to the revenue outperformance were VAT, corporate income tax (CIT), and dividends tax. VAT collection has been revised significantly higher, with an overrun of R15.3 billion. This translates into growth of 8.7% 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, amid resilient household consumption expenditure, along with a slower pay-out of VAT refunds by SARS.

Company tax

Company tax collection increased by 8.7% compared to the projected growth of 6.3%. This translates into a gain of R7.8 billion compared to the 2025 Budget. The upward revision to tax on corporate income and profits will translate into a combined windfall of R12 billion, amid strong collections from almost all sectors of the economy, especially mining, which was boosted by higher PGM and gold prices. Dividends tax collection was boosted by large once-off collections from the mining and retail sectors and a recovery in corporate profits overall.

Personal income tax

Personal income tax collection also achieved a strong growth rate of 7.7% in 2025/2026, but it underperformed the budget, resulting in a R6.2 billion shortfall. Unfortunately, the tax collected from robust two-pot system withdrawals during the year was not enough to offset subdued private sector wage growth.

The exceptionally large tax receipts over the past two years mean the fiscal authorities were not forced to seek additional tax revenue through substantial tax hikes. Instead, the Minister recognised the financial strain that households were under and provided some relief, announcing only modest tax changes.

No surprises

Fortunately, and very positively, in the 2026/2027 Budget the Minister avoided any surprise tax adjustments. In fact, he provided relief for households from the impact of fiscal drag as well as increases to medical tax credits for the first time since 2023/2024. This should provide individuals with R13.7 billion in tax relief, especially lower‐ and middle‐income households. For example, because of the adjustment to the tax thresholds, a person earning R250 000 will pay R1 225 less tax for the year (a -4.3% reduction) while a person earning R1 million will pay R3 991 less (a -1.4% reduction). To encourage savings, the tax-free investment annual limit has been increased from R36 000 to R46 000. The lifetime contribution limit is unchanged at R500 000.

Fuel and other levies

Unfortunately, the general fuel levy and Road Accident Fund (RAF) levy will be increased for the first time in three years. From 1 April the general fuel levy is increased by less than inflation to R4.10/litre for petrol and R3.93/litre for diesel. The RAF levy will be increased by 7c/litre, in line with expected inflation. In addition, there will be inflation-linked increases in the usual array of excise duties, especially on alcohol and certain categories of tobacco products. This means the Minister increased excise duties on alcohol, cigarettes, pipe tobacco, cigars, and vapes by 3.4%. The customs and excise levy, however, will remain unchanged.

No further tax increases

The relatively muted tax proposals mean revenue will increase to only R2.13 trillion in 2026/2027 and R2.25 trillion in 2027/2028. This is a combined R52.7 billion below the projections presented in last year’s National Budget. According to Treasury, this is primarily due to the withdrawal of the R20 billion proposed tax increases. In the May 2025 Budget, the Minister announced that National Treasury would reconsider the proposed tax increases if SARS could collect an additional R20 billion in tax debt. While SARS was unable to reach this target, the Minister decided to withdraw the additional tax proposals, given the potential negative impact on the economy and the overall improving fiscal metrics.

This means that total tax revenue is expected to increase by only 6% relative to 2026/2027. Gross tax revenue growth is projected to average 5.8% for the three years to 2028/2029. This is achievable, as it implies a tax buoyancy of only 1.1, below the long-term average of 1.2. However, there are still some risks to government’s tax collection projections, the biggest being sluggish economic growth projections.

Economic growth remains critical

It is abundantly clear that 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 undermine the government’s attempts to meet its social economic objectives.

The expenditure side of the Budget

In 2025/2026, government expenditure amounted to R2.58 trillion, which is a modest R0.145 billion more than the initial Budget.

In 2026/2027, government is budgeting to spend R2.67 trillion, which is a relatively modest rise (3.5%) considering that over the past five years government expenditure has increased by an annual average of around 5.9%. The bulk of government’s spending is still allocated to education at R520.3 billion or 19.5% of total expenditure, followed by social protection at R446 billion (16.7% of expenditure) and health care at R301.3 billion (11.3% of expenditure).

Overall, consolidated spending is expected to increase by 3.9% over the medium term, marginally above the expected medium-term inflation forecast (3.3%), with non-interest expenditure being a combined R19.4 billion lower than the previous estimate. The subdued expenditure expectations are a result of baselines being aligned with the lower medium-term inflation outlook. In particular, goods and services spending, along with the wage bill, are expected to ease, with growth moving closer to expected inflation.

In addition, National Treasury was able to improve the efficiency of government spending by implementing the Targeted and Responsible Savings (TARS) initiative announced in the 2025 MTBPS. The aim of the programme is to shift funds from ineffective programmes to priority projects without increasing the total spending ceiling. According to National Treasury, the first round of the TARS process has identified R12 billion in wasteful or ineffective programmes, the biggest of which is the public transport network grant. These savings will go towards funding priority spending increases identified in this year’s Budget, with a significant portion going to PRASA’s Metrorail service. With the additional funds, PRASA aims to increase ridership from 116 million passenger trips in the current year to 450 million by 2028/2029.

Unfortunately, debt servicing costs continue to take up a large portion of government expenditure, which is projected at 16.2% of total expenditure in 2026/2027, up from 11.1% at recently as 2019/2020. Positively, however, it has finally become one of the slower-growing areas of government spending, projected to grow by only 3.7% over the medium term. According to National Treasury, the slower growth reflects improved bond yields, an appreciating rand exchange rate, and lower inflation and interest rates.

There continues to be a focus on infrastructure expenditure in this year’s Budget. Not only is economic development the fastest-growing expenditure function over the medium term (with an average growth of 5.8%), but infrastructure investments, focused on water and roads, are being prioritised and allocated R526.3 billion over the medium term. While this is not nearly enough to make a significant dent in the infrastructure shortfall that the country is facing, it is another step in the right direction.

The Minister of Finance has extended the social relief of distress (SRD) grant by another year until March 2027, with the amount staying at R370. This gives government time to finalise a comprehensive and permanent policy on income support for working-age individuals. The grant is expected to benefit 8.2 million people and cost taxpayers R36.9 billion in 2026/2027. In addition, a provisional allocation of R3 billion has been set aside for the SRD grant over the medium term, pending a comprehensive review of the entire social grant system. These payments are over and above the existing social security grants. Currently 18.3 million South Africans receive a social grant, which is around 29% of the population.

Importantly, while the President announced that the SRD will be used as a basis for the introduction of a sustainable form of income support for unemployed people, this needs to be matched by a corresponding permanent increase in revenue, decrease in spending or combination of the two. Concerningly, government has not provided for the potential expansion of the Covid-19 grant to increase the number of recipients following the High Court in Pretoria’s ruling that the government needed to increase the grant, raise the income threshold and allow people to apply in person.

Other key policy announcements

Further easing of exchange controls

There were some small, individual-focused changes to exchange controls. These include:

• Increasing the single discretionary allowance limit for private individuals from R1 million to R2 million per calendar year via Authorised Dealers. This is for all purposes, including travel, gifts, remittances, investments and donations.
• Increasing the limit for cross-border credit card use from R50 000 to R100 000 per transaction.
• To reduce red tape, the limit for miscellaneous payments to non-residents is increased from R100 000 to R200 000 per transaction.
• Increasing the carrying of cash offshore from R25 000 to R100 000.
• In addition, National Treasury will allow asset managers to manage their portfolios locally in foreign currency in the same way that corporations are permitted to under the Hold Co concept. The reforms would enable asset managers to engage in two main activities:

1. The management of portfolios of foreign assets
2. The trading of foreign currency denominated financial instruments.

Adjustments to the public sector wage bill

Government’s intention to contain salary increases remains a key focus area. Over the last 10 years, compensation of public sector employees has become one of the largest components of government spending. In 2018/2019 it accounted for a substantial 35.6% of total consolidated expenditure but it has decreased to 31.4% in 2025/2026 – although it is expected to creep up in 2028/2029.

Although it is moving in the right direction, SA’s wage cost remains exceptionally high by international standards. While the Minister has outlined government’s intention to control salary expenses, it is unclear whether this plan can be achieved – especially given the push-back from the major public sector trade unions. Given this, the wage bill growth is projected to average 4.4% over the medium term, above the 3.4% average inflation for the period.

Importantly, however, in an effort to further contain the wage bill, National Treasury introduced two programmes. The first is a process to remove ghost workers from the national and provincial payroll. While the initial results flagged 8 854 individuals who were either receiving payments from multiple departments, were inactive employees or had bank account anomalies, the two-month verification process that started in January 2026 resulted in the number being reduced to only 4 323 high-risk cases where payroll system fraud may be involved.

According to National Treasury, the next phase of the project will be to verify these high-risk employees using facial matching against the National Population Register and physical verification. Employees who cannot be physically verified will have their salaries withheld and their employment status suspended. The project will then be integrated with the improvements to payroll systems and the roll-out of a single sign-on for public servants. These changes will enable automated oversight, reduce irregularities and support more effective expenditure management.

The second programme is the early retirement programme, which started in October 2025. Since then, 7 687 applications have been approved, with R3.7 billion of the available R11 billion being drawn down. According to the National Treasury, the estimated net saving from this programme is R5.5 billion, of which R2.6 billion will be realised in 2026/2027, R1.4 billion in 2027/2028 and R1.5 billion in 2028/2029. Unfortunately, this is below the expected savings of R7.1 billion per year over the medium term that National Treasury outlined in the 2025 MTBPS, suggesting a slower-than-expected uptake. Wage increases continue to represent one of the biggest risks to National Treasury’s expenditure projections.

SA’s national debt remains uncomfortably high

SA’s gross government debt has risen appreciably over the past 15 years, increasing from a very respectable 23.6% of GDP in 2008 to a concerning 78.9% of GDP in 2026. The increased level of debt has not only contributed to the deterioration of the country’s international credit rating, but has also pushed the debt servicing cost to over 20% of government revenue, limiting the flexibility of fiscal policy.

Unfortunately, the weaker nominal GDP growth (from lower inflation) and a decision to take advantage of strong investor demand in domestic and global markets by increasing issuance in 2025/2026 means that government’s debt-to-GDP increased more substantially than was initially projected last year. The level of government debt is projected to peak at 78.9% of GDP in 2025/2026 and remain above 75% of GDP for the next three years, moderating to around 76.5% of GDP in 2028.

Although the Minister of Finance has previously highlighted that government has too many departments and that work needs to be done to reconfigure the size and structure of the state by consolidating government departments, entities and programmes, very little has been achieved. 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 its fiscal resources have deteriorated, limiting government’s ability to close the gap between policy intention and enactment.

Debt servicing costs continue to rise, but at a more modest pace

As mentioned earlier, SA’s public sector debt and debt servicing costs have escalated dramatically in recent years. The cost of state debt has been the fastest-rising element in the budget in recent years, costing the country more than R1.2 billion each day and highlighting the need for government to contain the fiscal deficit to reduce total debt as a percentage of GDP.

Under these circumstances, a significant rise in bond yields, for whatever reason, would put SA’s fiscal position under increasing strain. Already the cost of debt exceeds the total budget allocation for key government departments, including public order and safety, health care, and housing development.

Encouragingly, although government’s gross debt to GDP remains high, it is expected to moderate on a sustained basis over the next eight years. In other words, while government debt and the associated debt services costs remain substantial and uncomfortably high, the deterioration is being contained, with government debt projected to fall to around 68.3% of GDP by 2033/2034.

Although the medium-term outlook for government debt is a little more encouraging, the level of foreign debt has increased appreciably in recent years, although off a very low base. For example, in 2008/2009 the level of foreign debt in the public sector amounted to a mere R97.3 billion, or 4% of GDP. Seventeen years later, it has risen to R628.4 billion, which is equivalent to a more concerning 8.1% of GDP. While 8.1% of GDP is still relatively low by international standards, a sustained weakening of the rand would compound SA’s fiscal constraints.

Conclusion

Overall, the Minister of Finance presented a credible National Budget that aims to further entrench fiscal discipline, while at the same time shifting the government’s expenditure priorities away from consumption and into infrastructural development. The Minister avoided the temptation to allocate significantly more capital to the various SOEs as well as salary payments. Instead, he reiterated the need to control expenditure in the medium term, while continuing the path of fiscal consolidation. The success of this year’s Budget will be determined by government’s ability to retain fiscal discipline, while at the same time ensuring that key policy initiatives are implemented effectively.

It is also clear that government’s debt issuance should remain manageable, especially given the conservative approach that National Treasury continues to adopt. Borrowing requirements have been reduced by transfers to government of R25 billion in 2025/2026 and R56 billion in 2026/2027 from the GFECRA.

Despite these efforts, four key fiscal concerns remain. Firstly, controlling the increase in social payments and wages over the next few years is going to remain challenging, given the ongoing lack of job creation. Secondly, the projected increase in tax collection over the next three years might be difficult to achieve if economic growth does not improve meaningfully. Thirdly, there is still a real risk that various SOEs will require additional government support over the coming years, the most concerning being Transnet. Lastly, the rise in debt service costs, if left unattended, could severely undermine government efforts to retain fiscal stability.

Although several policy options are available to revitalise the South African economy in the medium-term and therefore improve government finances, the range of workable solutions has diminished substantially in the past ten years, given the destruction of the public sector’s balance sheet and the weakening of key public sector institutions, including many SOEs.

At this stage the most viable policy initiatives would still include: substantially expanding the use of private-public partnerships; extensive deregulation of the business sector in a concerted effort to make it easier to do business and lift business confidence; a turnaround strategy for failing municipalities; a demonstrable focus on restoring good governance (including successful prosecutions); and the ongoing reorganisation of SA’s fragile rail and port capacity.