Budget: debt stabilisation as expected this year, modest tax relief

Gross debt is expected to peak at 78.9%/GDP in the current tax year, then drop below 75%/GDP in five years’ time. Revenue lifted by R29bn, withdrawing the R20bn tax proposal, and the rand was little changed at R15.88/USD. 

We estimated a R26bn revenue overrun, but the fiscus expects a greater lift in the pace of revenue collection in the remainder of 2025/26, which ends in March of the 2026 calendar year.  

There are no tax increases proposed over the medium-term expenditure framework period (MTEF) either, of 2026/27 to 2028/29, save the counterbalancing effect of a R1bn rise in the carbon fuel levy but a R1bn inflation drop in the general fuel levy.

This is as revenue was adjusted upwards in the MTEF as well, now running at 5.0% y/y to 6.0% y/y, all main budget figures. The revenue overrun in 2026/27 with this year’s, is close to R55bn resulting in tax relief (for bracket creep) as expected.

Fiscal sustainability improving

For this year, 2025/26, which is near complete, debt service costs are revised lower, by about R6bn, the general fuel levy stayed unchanged and less than R1bn increase in public sector costs, adding to the positive outcome overall.  

South Africa runs a primary balance surplus over the forecast period, indicative of fiscal sustainability improving. The budget deficit is projected to fall from -4.5%/GDP this year, to -3.1% of GDP by 2028/29.

Credit ratings upgrades are expected from S&P (currently BB) in the next eighteen months and by Fitch (BB-) and Moodys (BB equivalent) over three years if debt/GDP nears 75% as economic growth accelerates to 3.0% y/y by 2030/31.

A fiscal anchor would help achieve fiscal consolidation and credit rating upgrades, and will be proposed in the MTBPS later this year. Key also is that non-interest expenditure falls to 26.6% of GDP by 2028/29 from 27.7% of GDP currently. 

While a good budget from a financial market perspective, the outcome was largely factored in for the rand, although the JSE gained, with revenue benefiting from windfalls from the jump in precious metals prices and agricultural production.

Growth forecasts increase

Government lifted its growth forecast for 2025, to 1.4% y/y from 1.2% y/y to 1.6% y/y this year from 1.5% y/y, with 2028 unchanged. It lowered its inflation forecast this year to 3.4% y/y from 3.2% y/y, 2027 and 2028 unchanged at 3.3% y/y and 3.2% y/y 

This has had the impact of reducing the nominal GDP outcome and the Budget notes “the higher debt peak is attributed to weaker nominal GDP growth and increased borrowing in 2025/26”.

As expected, the Budget notes progress in Operation Vulindlela, but acknowledges “progress with reform implementation has been slow due to the complexity of some reforms and associated legislative and administrative processes”.

Fixed investment amounts to R1.1 trillion over the medium-term in the budget, “54.1 per cent, or R577.4 billion of the total planned infrastructure expenditure will be executed by state-owned companies and public entities”.

“A debt-stabilising main budget primary surplus this year of 0.9% of GDP, grows to over 1.0% of GDP over the medium term, benefiting from improved revenue collection”, and is expected to “anchor fiscal policy over the medium term”.

“Debt-service costs are revised down by R10.6 billion over the medium term, driven by improved bond yields, an appreciating rand, and lower inflation and interest rates”, although there is a risk from higher bond yields in market-risk off.

Tax relief

Tax relief occurs as “thresholds, rebates and duties are adjusted for inflation, personal income tax brackets and rebates, and medical tax credits, are adjusted in line with expected inflation”.

For the usual increase in sin taxes “excise duties on alcoholic beverages and tobacco products increase in line with inflation”. “Effective 1 April 2026, the compulsory VAT registration threshold increases to R2.3 million”.

The rise in the VAT threshold aids small businesses, “the tax-free investments annual limit is increased from R36 000 to R46 000”. There is no fiscal slippage, but debt ratios are still projected above the sustainable 60% /GDP mark for EMs.