By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
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; the main budget deficit is expected to narrow; and the primary surplus (revenue minus non-interest expenditure) is expected to grow. This is amid pressing spending priorities related to infrastructure investment and supporting vulnerable households. The budget followed through on the State of the Nation Address (SoNA) earlier in the month and was well received. Here are the highlights.
Revenue
Gross tax revenue is expected to exceed the 2025 Medium-Term Budget Policy Statement (MTBPS) projection by R1.6 billion in 2025/26, reflecting growth of 8.2% y/y to R2 006.9 billion that is supported by a commodity price windfall and higher net VAT collections. Combined with the R19.7 billion upward revision incorporated in the 2025 MTBPS, this means that gross tax revenue is higher by R21.3 billion compared to the 2025 Budget 3.0 projection. In line with this, Treasury withdrew tax increases of R20 billion that were pencilled in for this year's budget. 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. There is also support for small business with tax thresholds raised.
Expenditure
The Budget maintained the broad medium-term spending plans outlined in the 2025 MTBPS, with greater emphasis 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, accounting for about 60% of non-interest spending -focusing on education, health and social protection. 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 but is lower by R19.4 billion (R5.2 billion in 2026/27 and R14.2 billion in 2027/28) as baselines have been rebased to align with the lower medium-term inflation outlook.
Budget balances
The main budget deficit is projected to decrease from 4.5% of GDP in 2025/26 to 2.9% in 2028/29, and the primary surplus rises from 0.9% of GDP in 2025/26 to 2.3% of GDP in 2028/29, remaining a critical anchor for debt stabilisation.
Debt
Gross debt is forecast to peak at 78.9% of GDP in the current fiscal year (2025/26), slightly higher than the initially projected peak of 77.9% in the 2025 MTBPS, but thereafter steadily declines to 76.5% of GDP in 2028/29. Debt-service costs rise in nominal terms from R420.6 billion in 2025/26 to R469.3 billion in 2028/29, but as a share of revenue these costs are projected to peak and decline from 21.3% in 2025/26 to 20.2% in 2028/29. For the first time in the current decade, the fiscal framework reflects debt-service costs growing more slowly than consolidated expenditure growth of 3.9%. Notably, projected debt-service costs reflect a downward revision of R10.6 billion relative to the 2025 MTBPS, underscoring improved bond yields, an appreciating rand exchange rate, and lower inflation and interest rates.
Week in review
The leading business cycle indicator, decreased by 1.0% m/m to 117.2 points in December, which reflects 3.9% annual growth versus 3.3% previously. The monthly fall was due to decrease in five of the seven available component time series which outweighed increases in South Africa's US-dollar denominated export commodity price index and an increase in the trend growth rate in the amount of new passenger vehicles sold. The largest negative contributors were a decrease in the trend growth rate in the real M1 money supply and a decrease in the amount of residential building plans approved.
Producer inflation slowed to 2.2% in January, from 2.9% in December. Month-on month (m/m), producer prices declined by 0.2%, reflecting a fall in food and fuel prices. Food prices declined by 0.4% m/m, underscoring a 5.4% monthly drop in meat prices. We expect producer inflation to have remained muted around the 2.0% handle in February, supported by a resilient rand and lower fuel prices.
Private Sector Credit Extension (PSCE) growth edged up to 8.8% y/y in January, from 8.7% in December. Corporate credit growth remained robust at 12.9% y/y, unchanged from the previous month. Meanwhile, household credit growth continued its gradual acceleration, rising to 4.0% y/y from 3.7%. This marks the strongest pace since February 2024 (4.3%). Within household credit, general loans and advances increased to 2.8% y/y (from 2.2% in December), vehicle asset finance accelerated to 8.9% (from 8.1%), and mortgage advances edged up to 2.8% (from 2.6%). On the corporate side, general loans and advances remained the key driver, expanding by a still-strong 15.6% y/y, albeit slightly softer than December's 16.2%. Corporate vehicle asset finance moderated to 6.9% (from 7.4%), while mortgage advances eased marginally to 6.4% after holding at 6.6% in November and December. Overall, corporate credit growth remains firm, while household credit is gradually gaining traction. We expect financial conditions to remain broadly supportive over the medium term, underpinned by lower borrowing costs and an anticipated improvement in macroeconomic conditions.
Week ahead
On Monday, manufacturing PMI I data for February will be released. The manufacturing PMI (seasonally adjusted) increased to 48.7 in January, remaining in contractionary territory. The increase was driven mainly by a rebound in business activity and new domestic sales orders, alongside a normalisation in inventories and some recovery in employment. However, exports remained a drag due to the stronger rand.
Also on Monday, new vehicle sales data for February will be released. Vehicle sales volumes increased by 7.5% y/y in January. The increase was mainly driven by commercial vehicle sales, which increased by 8.5%, while passenger car sales increased by 7.1%.
On Wednesday, the RMB/BER Confidence Index (BCI) for 1Q26 will be published. In 4Q25, the BCI rose to 44 index points, up from 39 previously. While the composite index showed a positive shift, this again masked pronounced sector-level movements. The survey period followed the South African Reserve Bank's rate cut and its shift toward a lower inflation target, which provided some relief to businesses. However, the lingering effects of earlier export tariffs and subdued global growth continued to weigh on the outlook, particularly for sectors exposed to international markets.
On Thursday, data for electricity production for January will be released. Electricity generation declined by 7.9% y/y in December, following a 7.3% decline in November. On a seasonally-adjusted basis, generation declined by 1.4% m/m, after a 1.3 m/m decline in November. Looking at the broader trend, electricity generation declined by 3.2% in the three months ending December, compared with the previous three-month period, pointing to a drag on 4Q25 GDP growth.
On Friday, data on the SA's gross foreign exchange reserves for February will be published. Gross foreign exchange reserves increased to $80.2 billion in January, up from $75.9 billion in December. The increase largely reflected higher US dollar gold prices, the maturity of forward exchange contracts undertaken for liquidity management purposes, valuation effects from foreign exchange and asset price movements, and foreign exchange purchases.
