Budget 2026 | What’s at stake?

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00:00 – Introduction

Jeremy: Hello and welcome. South Africa's Public finances have long been a story of drift, of rising debt, widening deficits, and stubbornly weak growth.

But in recent months, something has shifted. The economy is entering a cyclical upswing, the Reserve bank has formalised a lower 3% inflation target, South Africa has exited the Financial Action Task Force (FATF) greylist, S&P has upgraded South Africa's sovereign outlook, bond yields have fallen and Treasury has held the line on fiscal consolidation in the Medium-Term Budget Policy Statement (MTBPS).

In his State of the Nation Address (SONA), President Cyril Ramaphosa reaffirmed commitments to logistics reform, to energy expansion and fixing municipal governance. There has also been a renewed emphasis on delivery.

Yet the numbers remain tight. Debt is near 78% of GDP, debt servicing costs are at 5% of GDP and growth is improving, but it's not improving decisively.

So, when the Finance Minister Enoch Godongwana rises to deliver the 2026 Budget Speech, he's going to do so not in crisis, but certainly in an atmosphere of constraint.

In this special Budget Speech edition of No Ordinary Wednesday, we are going to preview the minister's upcoming speech through three lenses of fiscal arithmetic, structural reform and investor confidence.

And for that, I'm joined by regular experts, Investec Chief Economist Annabel Bishop, along with Treasury Economist Tertia Jacobs. To both of you, a very warm welcome.

01:40 – Is this the beginning of stabilisation?

Jeremy: Tertia, let's begin with the numbers if we can. At face value, the fiscal picture appears to be marginally better than maybe all of us feared. Revenue running at around 71.2% of the annual target, that's slightly ahead of last year. The deficit so far, standing at R243 billion narrower than the R286 billion recorded at the same stage about a year ago.

So, if this pace persists, the full year deficit could undershoot the revised Medium Term Budget Policy Statement projection. Is this the beginning of stabilisation or maybe just a temporary reprieve?

Tertia: Jeremy, that's a very important question. I would say that with the November MTBPS, it feels like we may have turned the corner and there were several reasons for it.

The first is, there was an overrun in revenue, which is helping, and then we have the windfall coming from the commodity side. And then, very importantly, there is more expenditure control, for example, counting the ghost workers, and that is playing off in the context of lower nominal GDP growth, because inflation is undershooting and the GDP growth is still relatively low.

But I think from treasury's perspective and with the GNU, there is agreement that debt consolidation is of primary importance.

03:10 - Is growth now the binding constraint on fiscal consolidation?

Jeremy: Annabel, South Africa's growth forecast has been revised lower at 1.5% this year and then rising as we've heard gradually thereafter. So, the economy may benefit cyclically from lower inflation and marginally stronger global demand. But structurally, we all know familiar conditions persist. Is the growth now the binding constraint on fiscal consolidation?

Annabel: So, it's certainly one big constraint and I think if you have a look at where we came from in the 2000s, we had really strong growth lifting to 5% for a number of years. Really from 2005/2006 onwards, which pushed through a huge amount of government revenue. So, it's incredibly helpful and I think it's also a constraint, certainly for bond yields.

I would say that, when we do get into a virtuous cycle, we start to see the economic growth potential increase and strong economic growth coming through from the implementation of structural changes, then I think we really are going to see an almost organic, sustainable type of government finance environment and economic growth environment, that's absolutely key.

But what we have seen instead, and certainly over the course of last year, has been that there's a really been a strong sentiment uplift towards South Africa.

There's obviously been strong foreign investment in our bond market, and we've seen yields come off about 200 basis points. And the key here is that it lowers borrowing costs. So, then you have obviously lower borrowing costs.

We're above 10% for government bond yields and now we're close to 8%. That also helps sustainability of government finances and that's absolutely key.

Let's also not forget as well, we had the credit rating upgrade further adding to sentiment from a bond perspective and overall, from a South Africa perspective. Then we of course remain on a positive outlook from S&P as well.

I think there's many factors which have come through as a confluence to help support government finances.

From a forward-looking perspective, we really need to start embedding a stronger fiscal environment. We need to still see fiscal consolidation. Let's not forget that it's only seen as sustainable for emerging markets if you have your debt-to-GDP ratio at 60% or below. So, there's that risk that it starts to balloon out, and that these lower borrowing costs are so helpful at the moment.

05:25 - What are the numbers that matter most in this Budget?

Jeremy: Tertia, investors are going to look beyond the rhetoric of the speech to implications, which is critical. From a market perspective, are there numbers that you think matter most in this budget?

Tertia: I think the first one would the debt consolidation. So, we know that debt is still very elevated at 78% of GDP and of interest is that the investors look beyond the high debt level. They look at the possible turnaround. So that is the first point.

But we need to see an improvement in fiscal consolidation because I suspect what's going to happen here is that it's more a sideways movement.

We really need to see a meaningful decline in debt servicing cost as a percentage of GDP, and that is why Treasury is running a primary budget surplus, that's your non-interest expenditure minus your revenue.

The problem is that even though our bond yields have come down quite dramatically, there's still a gap with the nominal GDP growth. From that perspective, it's difficult to stabilise your debt servicing costs, and that basically means either the economy has to grow faster, which is the first prize, or your bond yield have to decline as we continue to fuel the constructive sentiment.

Annabel: For me, also a very key number as well, is expenditure and the reason why I bring this up is because there's an additional expenditure risk.

If you remember at the MTBPS, it pushed through a whole lot of additional expenditure items and that actually ate up the revenue overrun, and of course, it alsol talked about potential further tax increases.

So that's where my worry comes from, that even though for the first nine months of the fiscal year, we're actually finding ourselves in the situation where the budget deficit is lower than it would be for the figure estimated for the year.

If that now carries on for the full 12 months, even though we're in that good space, they could just eat it up with additional expenditure items. And of course, the Madlanga Commission and all the others as well are the tough items that actually go into it, so that's just one of the concerns I have in the environment.

Yes, we've got really good figures, we could have a good budget, but there is that outside risk that we're sitting on.

07:37 - How material could the revenue windfall be?

Jeremy: Commodity prices, Annabel, have provided a lot of support. SARS has been allocated around R4 billion over three years to strengthen collections. That's a good thing. It's targeting an estimated R550 billion in undisputed tax debt. So how material do you think this revenue windfall could be?

Annabel: So, it's important because it's not just the gold price, obviously that's seen as this strong rally, also we see platinum group metals as well. And the nice thing about it is that because of the small volume and high price of precious metals, it doesn't actually get hit by the port delays. For example, if you do go through a bad situation with exports.

And even though we've seen container traffic increase for the fourth quarter of last year, there's actually been a pullback. There's actually been a decline in traffic, and it's a bit of a stop-start. So, it's quite nice that you've got a low volume, but very high value good, which has really become our largest export now. Gold and precious metals are now our largest export.

So yes, it is a windfall. For government finances, and typically what is often done with windfalls, and in fact even in some countries, you see a higher tax to capture more of the windfall. Government often ring-fences and uses it for certain areas.

Now, for us, of course, we think it's just going to go back into the general pot, but typically it can actually be stored and used for savings. In other words, to counteract a situation where perhaps you get very high oil prices and a very strong impact on consumers, negative impact, and then you can actually use that windfall to try and reduce oil prices to help in a future date. We don't think that's going to happen.

I think the days of government storing nuts in the tree, for example, for the winter when things go bad, are probably over for the moment. And I think it's probably just going to go back into expenditure pot.

09:21 - How could Treasury best use this windfall?

Jeremy: Tertia looking at the economy, how should Treasury best use this windfall?

Tertia: I think the first one you know, is to try and reduce the debt burden. So, we will be watching what they will do with bond supply. In November they announced a reduction.

Number two is, I think, what the most salient decision would be is to increase your CapEx expenditure. We really need to increase our fixed investment ratio as a percentage of GDP, from about 14% to 30%. That's the big focus. So, if we can see more of a switch from current to CapEx spending, I think that would be the first prize.

10:40 – Has fiscal slippage become the default trend?

Jeremy: Annabel on a consolidated basis, the deficit has widened in recent years, to around 5% of GDP, and debt has edged up toward 78%. Is it fair to say then that fiscal slippage has become the default trend and that avoiding further deterioration is perhaps perceived now as a success?

Annabel: We obviously have had a lot of fiscal slippage. Again, we saw in the past, at the MTBPS as well, even if it's 0.1 to 0.2 compared to what was projected it is still fiscal slippage.

And of course, as a consequence, if we look at where we are sitting now at the 5% deficit, as you said, sustainability for an emerging market country is 3% deficit or less. So, this is the risk that we really are playing with.

And I do think, you know, that many years of fiscal slippage has become a characteristic, it's become normalised behaviour for South Africa. If there are additional expenditures that we were talking about earlier, and of course, we saw the lack of appetite last time around in the Budget for VAT increases, we'll just push it through to higher borrowing. And for me, that's an area that really needs to be focused on as a priority.

We're having the fiscal anchors come in, and we certainly think they're going to be a type of flexible fiscal anchor which is going to help to ground and even reduce these types of expenditure pressures.

But of course, the bottom line is we actually need to reduce, not even stabilise, but reduce our debt-to-GDP ratio. It's absolutely critical because given the elevation in our debt to GDP ratio, to above 70%, and now towards 80% mark since COVID, there's little room for a further crisis and for further money needing to be borrowed.

And of course, when we stare down the line, you're increasingly seeing the impacts from climate change and of course countries around the world are seeing that impact come through as well. That puts a huge amount of pressure on government finances.

We have got several years to start to reel this in if we continue to allow this fiscal slippage to go out. We know that the climate change effects get worse every year, and that is really where government is expected to step in to help citizens, to help the country to repair and to fix, and that can be quite a large worry down the line.

So, I really think both globally and in South Africa, we need to see debt-to-GDP ratios reeled in. The IMF talks about globally going over a hundred percent and it is certainly a fiscal stressor.

Tertia: I would like to add here, and the important thing in South Africa is with the GNU, and that is what we saw this time last year, that there's commitment from the GNU that we must stabilise the debt.

So, if there's an increase in expenditure, it must be countered by a tax increase and that was where the whole debacle about the VAT increase played out.

So, the compromise at the end of the day was that expenditure was increased, but at a smaller amount because the tax increase that we ended up with was relatively smaller. But the budget deficit has to be protected because that is what drives your debt-to-GDP level.

13:07 - What would this Budget need to demonstrate to strengthen the case for an upgrade?

Jeremy: Both of you have outlined a lot of positives, yet we still remain below investment grade: rated BB by Moody's and S&P and BB minus by Fitch, S&P maintaining a positive outlook. What in this budget, in your opinion, could or would demonstrate something to strengthen the case for an upgrade within the next year or so?

Tertia: That's important because when there's been a rating change, normally the rating agency has about 12 to 15 months before it then either upgrades or goes back to the current rating. So, I think the key focus points here remain the debt consolidation because the rating upgrade that S&P gave us last year was to give recognition for the reform momentum that continues.

We've been removed from the FATF greylist and the MTBPS showed commitment to fiscal consolidation. In other words, not to let the debt-to- GDP rate rise further.

So, I think, if government can stick to its current path, that's important, and that is what Moody’s also look at, is what happens to fixed investment? When is that kicker in infrastructure investment going to translate into higher private sector fixed investment?

In the SONA, the president reiterated the importance of the private sector to drive this infrastructure fixed investment. So that is where we need to see an escalation in the PPPs, in logistics, and especially water.

15:17 - Can households absorb further stealth tax increases?

Jeremy: Tertia, there is another issue, which I think is maybe a little less visible, but maybe more immediate to South African households. Treasury has effectively relied on fiscal drag in recent years, offering no bracket creep relief to personal income taxpayers. Another R20 billion or so has been pencilled into the baseline. Now, in an economy that is growing at barely 1.5%, the question is, can households absorb further stealth tax increases?

Tertia: Jeremy, it's so important, and I think that relates to, when we talked about the VAT increases last year, what was it replaced with. It was replaced with bracket creep. This is the easiest way for Treasury to raise money: when people get inflation-related increases, the tax brackets are not adjusted. So that's an easy R16 to R18 billion per year.

What we have seen is that over the past two years when bracket creep was the tax that reduced disposable income by about R52 billion. Now, in terms of the context of the GNU and Treasury's commitment to keep the budget deficit unchanged, when you increase your expenditure, Treasury has pencilled in another R20 billion and R21 billion in the next two fiscal years.

That is why your earlier question about what the best way is to spend that windfall in tax revenues actually so important. I think that, as we said, if we can increase CapEx spending, but I do think there will be some relief in reducing tax brackets. So, I think that will be another channel where they can allocate some of the windfall too.

16:52 - How important is progress at the municipal level?

Jeremy: In terms of progress around municipal level. We know that many municipalities in this country are on the verge of collapse. What do we need to look for there? What might emerge? What should emerge?

Tertia: That's also very important because we know that economic activity takes place at the local level. For example, Gauteng contributes about 35% to GDP. It's the manufacturing hub of South Africa. So, on the one hand we've got Operation Vulindlela, that deals with the logistics, but the local authorities are also nowon its watch list.

So, in terms of what the President announced in SONA is that there will be a white paper published in April, and that is where it's going to look at the structure of local authorities because some of the local authorities are just too small and too ineffective.

We know that the true problems are actually cadre deployment, that there's not enough capacity and there's a lack of skills. So that also needs to be addressed. But the President has said that there can now be intervention from the national and provincial governments into dysfunctional municipalities.

Very importantly, also in the context of the water crisis, has been the move to start to ring fence trading revenue from municipalities. For example, when households pay for water and electricity, that money actually went into a pool, which went into paying salaries.

So, there's now a big drive to ring fence so that it can actually go into maintenance of infrastructure that's really been neglected. I think we are watching this, but it's absolutely critical because that is also something that's holding back growth.

18:39 - How exposed is the fiscal framework to renewed wage pressures?

Jeremy: Let's move on to the fiscal framework and how it exposed it is to renewed wage pressure, which is also a factor.

Annabel: So, you can see pressures coming in from every side for government finances. In past years, we actually have seen that big concern. Of course, we've obviously seen multi-year bargaining come through.

What is very interesting is the new inflation target, the 3% target is so well below where the bargaining has started historically, and even where bargaining starts now. And this, of course, is going to be the big kicker, the big issue.

And also from a secondary perspective, not just for fiscal policy, but for monetary policy as well, getting inflation expectations down are key to keep South Africa's inflation rate embedded around the 3% mark and particularly that really talks to then salary and wage increases.

And of course, we recall decades ago when we had those rolling strike actions, which really decimated the economy, it can actually cause you to go into a recession. It was so substantially significant.

Now we're not anticipating that to happen again and of course, the multi-year wage bargaining agreements are specifically done to try and take a lot of the heat out the system. But I think there is a period of friction now trying to force down the very substantial and elevated wage expectations in South Africa to obviously the new inflation target rate.

Look, we're in a very sweet spot, we've got a situation where low global oil prices, very substantial rand strength against the US dollar, mostly as a consequence of US dollar weakness, and of course very modest agricultural prices globally have all helped in getting inflation down very substantially in South Africa, along with weak demand.

We expect that cycle to turn, we expect economic demand to strengthen quite substantially in South Africa, which could put some pressure on our inflation and in turn then on living costs and then feed through back into these wage bargaining agreements.

It's a very large component of the budget. It's a very large component of expenditure and it will be closely watched. It will be something that the credit rating agencies also look at very closely as well. Because here you actually, again embedding something in the system and it's actually something that needs to start to come off.

Look, Tertia spoke about removing ghost workers earlier, the rationalisation, streamlining of the civil service. But I think, last year they also announced as well that there's a need to move off quite a lot of highly paid elder civil servants, early retirement and bring in younger, lower cost civil servants because of wage progression.

So, I do think it's going to be a focus but probably not as big a focus as it has been in previous years, given that there are so many other issues.

21:11 - What is the single most important signal this Budget must send?

Jeremy: So, to both of you, a lot to absorb and now I want to congratulate both of you, for the next three minutes, you've both been appointed special advisor to the Minister of Finance. So back to you, Annabel Bishop. What's the single most important signal that he has got to send? If you had a few minutes in front of him, what would you say to him?

Annabel: Look, I certainly think again, it comes back to the debt-to-GDP ratio. It's just so crucial for me because, what I really worry about is the huge rally we've seen in bond markets gets reversed. We're in a global risk on phase, and there's huge appetite for risk assets around the world. There's huge appetite for South Africa's government debt, and of course, that's cycle turns. We do see these cycles turn.

So, I think that with the winds of the precious metal rally, and of course, you know, the strengthening, the bit we could have in our government finances, I think government needs to actually look to reduce surpluses quite urgently and put a real cap on additional expenditure.

We just cannot continue to have this because it just blows out the budget. So that would really be the point that I would make to watch expenditure more critically and to try and actually start to reduce the debt-to-GDP ratio. It's not necessarily about stabilisation only.

Tertia: Jeremy, so I'm going to go from the assumption that there is a commitment of debt consolidation, so I will use my opportunity to make big inroads into the professionalisation of government to improve the efficiency, the functioning and the delivery.

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