By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano.
The fiscal framework indicates a narrowing of the budget deficit and a sustainable path for public finances. It provides relief to households and, more importantly, formal small businesses. Key highlights include:
2026 Budget in a nutshell
Titled, 'A fiscal turning point in a resilient economy', the 2026 Budget tabled by Minister of Finance Enoch Godongwana, reflects that the fiscal commitment made three years ago to stabilise debt in the current fiscal year (2025/26) is on track, with debt now estimated to peak at 78.9% of GDP and projected to gradually decline over the medium term to 76.5% in 2028/29, reaching 68.3% by 2033/34 (Figure 1). While the estimated peak point is higher by 1.0-percentage points (ppts) relative to the 2025 MTBPS target of 77.9%, it partly reflects lower nominal GDP than previously projected, as well as government's decision to increase cash holdings in the current fiscal year to better manage large redemptions due over the medium term.
The medium-term fiscal framework remains anchored on a primary budget surplus (revenue minus non-interest expenditure) that grows steadily from 0.9% of GDP in 2025/26 to 2.3% of GDP in 2028/29, placing government debt on a sustainable path. To support government's medium-term fiscal strategy of stabilising debt and reducing it sustainably, government is focused on supporting growth and accelerating public infrastructure investment through:
1. Improving spending efficiency by implementing the Targeted and Responsible Savings (TARS) initiative. This initiative has already identified R12 billion in savings over the medium term. This will be an entrenched part of the budget process to eliminated inefficiencies and low-performing programmes.
2. Containing the public-service wage bill while increasing capital investment. The current three-year wage agreement for 2025/26 to 2027/28 provides stability over the medium term. However, additional steps are being undertaken to manage the wage bill, including:
3. Entrenching sustainable public finances with a principles-led fiscal anchor. Government is preparing to propose a fiscal anchor based on principles rather than numerical rules. The anchor will require each new administration to table a medium-term plan to maintain fiscal sustainability. Details of the fiscal anchor will be announced at the 2026 MTBPS.
With the fiscal strategy on course, Treasury has withdrawn tax increases of R20 billion that were pencilled in for this year's budget to fund new and persistent pressures. It is also proposing inflationary relief for taxpayers (i.e., personal income tax brackets and medical tax credits will be fully adjusted for inflation after two years of fiscal drag) to support the ongoing economic recovery.
Importantly, we view this budget as positive for both households and formal small businesses. For the first time since 2009, VAT compulsory registration threshold for small businesses will increase from R1 million to a proposed R2.3 million effective 1 April 2026. Meanwhile, the annual turnover limit for the turnover tax will also increase from R1 million to R2.3 million effective 1 March 2026. This is fundamental and will provide much needed relief for small businesses, in an environment where electricity costs have increased sharply, putting pressure on overall input costs for small businesses. It should also further encourage small informal businesses to formalise, enabling them to access finance from commercial banks.
Public investment and infrastructure development
Reforms are underway to mobilise private investment and expertise and accelerate public-sector delivery, to improve operating conditions. Government's own capital spending over the medium-term expenditure framework (MTEF) is expected to grow by 9.7% per year, equating to robust real capital growth. This is significantly higher than the 4.4% annual growth for compensation of employees. For the first time in the current decade, the fiscal framework reflects debt-service costs growing more slowly than overall expenditure growth of 3.9% (Figure 2).
Investment in public infrastructure remains a fundamental priority to stimulate economic growth and improve public services. It is fundamental to long-term economic growth service delivery, job creation and climate resilience. Planned infrastructure expenditure over the next three fiscal years amounts to R1.07 trillion, with significant funding allocated to transport and logistics, energy and water projects to remove growth constraints (Figure 3).
Economic growth projections
Treasury expects the economy to grow steadily, supported by structural reforms, improved investor confidence, lower interest rates and higher investment. Real GDP growth is estimated to have reached 1.4% in 2025 and is projected to rise to 1.6% in 2026, 1.8% in 2027 and 2.0% in 2028 (Figure 4). Compared to the 2025 MTBPS, this reflects a marginal 0.2ppt lift in the 2025 growth forecast and a 0.1ppt lift in the 2026 growth forecast, while the 2027 and 2028 growth forecasts are unchanged.
Government's key growth strategy includes maintaining macroeconomic stability and implementing structural reforms. Following two years of decline, gross fixed capital formation (fixed investment) is projected to rebound to 2.4% in 2026, further rising to 3.3% in 2027 and 3.9% in 2028, as lower interest rates improve financing conditions and public-sector projects in energy, water and transport move into construction. While we concur with this view, our forecast is less optimistic than Treasury's, and we believe that a higher fixed-investment growth path will require deep reforms and no execution delays of key infrastructure projects.
Details on tax revenue performance and tax policy proposals
Gross tax revenue is expected to exceed the 2025 MTBPS projection by R1.6 billion in 2025/26, reflecting growth of 8.2% y/y to R2 006.9 billion. Combined with the R19.7 billion upward revision at the 2025 MTBPS, this means that gross tax revenue is higher by R21.3 billion compared to the 2025 Budget 3.0 projection. Gross tax revenue is anticipated to increase by 5.8% per annum over the three-year forecast but is lower by R57.2 billion cumulatively relative to the 2025 MTBPS projection, due to the withdrawal of the earlier proposed tax increases. However, non-tax revenue is revised up by R3.2 billion in 2025/26 and by R16.9 billion over the three-year forecast, underpinned by higher-than-expected collections for mineral and petroleum royalties due to higher commodity prices. Net Value Added Tax (VAT) and Corporate Income Tax (CIT) receipts have underpinned the decent in-year tax revenue performance.
Several tax policy proposals have been made to balance economic growth and climate change mitigation efforts. The 2026 Budget provides inflationary adjustments to tax brackets and rebates providing much needed relief to taxpayers for the first time since 2023/24. Relief from personal income tax brackets adjustment amount to a total of R13.7 billion, with lower- and middle-income taxpayers deriving the most relief.
Spending balances social and infrastructure needs
The 2026 Budget maintains the broad medium-term spending plans outlined in the 2025 MTBPS, with greater emphasis now being placed on improving the efficiency of state expenditure. Government departments must now be more deliberate in motivating their budgets rather than simply increasing them by inflation each year, with a focus on providing evidence-based assessment for the continuation of programmes and projects. The social wage remains a priority, focusing on education, health and social protection. It (the social wage) accounts for about 60% of non-interest spending over the medium term, supporting 13.6 million school children, healthcare services to 84% of the population and 26.5 million social grant beneficiaries.
Main non-interest expenditure for 2025/26 is revised up by R22.1 billion to R1 906.5 billion relative to 2025 Budget 3.0 to account for upward expenditure adjustments of R66.7 billion, which were counteracted by downward expenditure adjustments of R50.7 billion. However, it is lower by R19.4 billion (R5.2 billion in 2026/27 and R14.2 billion in 2027/28), mainly because baselines have been rebased to align with the lower medium-term inflation outlook. Over the three-year forecast horizon, non- interest expenditure is projected to grow by 3.5% per annum, reaching R2 111.7 billion in 2028/29 (See Appendix for spending details).
Budget Review - Market implications
As was widely expected, Finance Minister Enoch Godongwana delivered a budget that reflected an improved fiscal position that benefitted from several positive tailwinds over the last 12 months. During the speech, the rand strengthened, and bond yields came down. The equity market moved notably higher. In particular, the Mid-cap indices (which is a good proxy for SA Inc.) popped up as investors digested the minister's speech as Small-caps and Financials recovered from lower levels.
For bonds: A sustained commitment to debt consolidation and the aim to produce a principal based fiscal anchor, as well as an issuance cut from the end of March, will be welcomed by debt holders. For the first time in many years, debt service costs are expected to grow slower than the overall expenditure bill.
For equities: This was a pro-growth budget and by extension, positive for equities. Personal tax relief will be positive for consumers. There was also notable tax relief announced for small business owners. Additionally, National Treasury emphasised its commitment to support structural reforms and economic growth - with early wins within the Operating Vulindlela framework already materialising.
Some of the more specific impacts on SA equities include:
Other important news for investors: Positively, the tax-free annual investment limit has been increased from R36 000 to R46 000 per year and the limit to retirement fund deductions was raised from R350 000 to R430 000, allowing individuals to invest more each year on a tax-free basis.
In all, National Treasury delivered a budget that balanced the importance of budget consolidation, addressed social issues, provided consumer relief, and reinforced government's commitment to necessary infrastructure investment and vital economic reforms. This Budget will act as important confirmation for local and international investors that treasury is delivering on its promises from a fiscal perspective that will compliment other pro-investment tailwinds like the lower inflation target, recent credit rating upgrade and the removal of South Africa from the Financial Action Task Force's grey list. In terms of valuation starting points, the Budget could ultimately boost the equity market (notably SA Inc) more than the bond market, as the latter has already seen very strong returns over the last few months in response to the above-mentioned positive investment drivers.
Appendix: Some selected spending priorities by function
