Market Update: South Africa turning a fiscal corner as crucial budget looms – Full Analysis

A new Bureau for Economic Research (BER) report indicates that South Africa could be turning fiscally, and the upcoming Budget speech will be crucial for South Africa’s fight against national debt.

Claire Bisseker from BER said that last year, South Africa experienced three national budgets in three months.

“The tussle nearly broke the GNU. Now, as we gear up for the tabling of the 2026 national budget on February 25, the country finds itself in an uncommonly sweet spot,” she said.

The shift to a 3% inflation target has paid off – sovereign risk and government borrowing costs are down, growth is firming, and SA has been rewarded with a rare credit rating upgrade.

“Commodity prices are also on a tear and, suddenly, SA has more fiscal wiggle room,” she said.

Bisseker said it is too soon to argue that the country’s fiscal fortunes have turned. “Fiscally, SA is only at a turning point if the government realises that it cannot continue to hike taxes or borrowing each year to compensate for a failure to make hard political trade-offs over things that endlessly inflate the size of the state – and if this realisation results in better scrutiny of expenditure as well as deep policy reform.”

Bisseker added that it is certainly too early to argue that South Africa is winning the war against debt.

“At best, the cabinet understands that debt is a real problem so it can’t keep borrowing more. However, whether it accepts that it can’t keep taxing more to finance new projects and priorities remains to be seen,” she said.

Bisseker said there was certainly nothing in the May 2025 budget to suggest that this lesson had been learnt.

“Instead of scrapping baseline expenditure based on hard trade-offs, all it did was scale back February’s R232bn shopping list. It still added R74bn in new money to departmental baselines – and it did so by leaning heavily on the consumer. Though the intended VAT hike was scrapped, no compensation was given for bracket creep for the second year in a row. This will take more than R53bn out of consumers’ pockets over the medium term – a hefty erosion of consumers’ income that will dampen growth,” she said. 

Bisseker added that the test of the 2026 budget will be whether the Treasury uses the commodity windfall to reduce the deficit and plug the R20bn hole in the budget, saving us from higher taxes, or whether it spends a large part of this cyclical revenue overrun on deferred items from the 2025 wish list, while continuing to stealthily ratchet up taxes.

Bisseker said it will undermine Treasury director-general Duncan Pieterse’s recent assertion that South Africa has reached “an important (fiscal) turning point.” “On the contrary, it will mean that despite improved appearances, nothing fundamental has changed. The 2026 budget provides an opportunity to prove that SA is indeed a different place by cutting consumption spending and providing relief for fiscal drag. Corporate tax cuts are tempting. Business is lobbying heavily for the carbon tax to be scrapped, but this would be shortsighted.”

Last year’s attempt to ram through a 2% VAT hike to finance a spending splurge demonstrated that many politicians still don’t realise they have to pull back from the brink even as the debt ratio approaches 80% and growth remains pedestrian. “Were it not for the shift to a 3% inflation target, and fortuitous global tailwinds, SA would not now be sitting so pretty. The 2026 budget provides an opportunity to cement recent fiscal gains; we cannot afford to squander this golden moment by spending rather than saving the windfall.”

Professor Waldo Krugell, an economist at North-West University, said the fiscal position remains a tricky one. “I think the Treasury is making progress in tackling the debt burden, but the war is far from won. They (and us the taxpayers) have to be in it for the long haul. That means achieving the primary surplus year after year, mainly by cutting wasteful spending and using windfalls wisely to reduce the borrowing requirement. All this while we are waiting for reforms to boost economic growth.”

Krugell added that in the end, the best way to reduce the debt/GDP ratio is not by reducing the debt, but by increasing the GDP.

Professor Bonke Dumisa, an independent economist, said that he agrees with the BER statement. “The new 3% target inflation rate has fortunately not resulted in inexplicable higher inflation expectations which could have backfired if the SARB did recklessly increase repo rates.”

Unisa economist Dr Eliphas Ndou said said that both the macroeconomic outlook and political uncertainty regarding the government of national unity have improved relative to the period leading up to last year’s budget speech. “This improvement helps to reduce the risk premium in debt revaluation. I foresee a marginal improvement in South Africa’s debt-to-GDP outlook through sustaining economic growth, low inflation, and improved inflation expectations, as these developments are likely to reinforce each other in lowering debt levels, including through revaluation, thereby reducing debt service costs.”

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