Economic performance
The real economic growth rate is expected to be 1.2% in 2025 (higher than the 0.5% achieved in 2024 and the 0.8% achieved in 2023). Government forecasts real economic growth to be 1.5% in 2026, 1.8% in 2027, and 2.0% in 2028.
Whilst short of South Africa’s economic growth, fiscal and employment needs, and low compared to emerging markets, the improving economic growth forecasts (considered by National Treasury in its budgeting) simply must be achieved (if not beaten).
South Africa’s consumer price inflation is on a glidepath lower. Inflation rates have come in at 5.4% in 2023, 4.4% in 2024 and is estimated at about 3.2% in 2025. Inflation rates are projected to come in at 3.7% in 2026, 3.3% in 2027 and at 3.2% in 2028.
Economic policy
South Africa’s policy is to grow the economy by focusing on, inter alia, macroeconomic stability, structural reforms, supporting public infrastructure spend, and building a capable state.
A lower inflation target of 3% is expected to result in lower interest rates over time, thereby supporting investment, spending, and economic growth.
Under Operation Vulindlela Government is pressing ahead with reforms to key network industries (energy, logistics and water). For South Africa to create a competitive and growing economy and entice investment, the lowered 3% inflation rate target must be matched by reformed energy, logistics, and water sectors to enable them to meet demand at competitive prices.
Achieving this requires improved governance and capacity at the local government level. Government has introduced a R54 billion performance based municipal grant to support municipal capital budgets, unlock private investment, and incentivise metros to refurbish electricity, water, waste and sanitation infrastructure and better manage such services. Measures are also being introduced to improve financial and operational performance of certain metros, reduce water leaks, and to set up a dedicated agency to boost maintenance and investment in bulk water infrastructure.
Performance at Eskom and Transnet has turned around and must continue to improve. The introduction of private sector players and competition should assist with increasing capacity and restrained price growth.
Operation Vulindlela also envisages enhanced provision of urban housing, public transport and the development of public digital infrastructure (including the development of digital identity and payment systems). This is in keeping with supporting productive infrastructure spend.
On the trade front South Africa is expected to face headwinds due to US tariffs on South African exports. A countervailing force has been strong and favourable precious metal prices which have improved South Africa’s terms of trade, currency and confidence. The fiscal impact depends on the durability thereof.
There has also been slight improvement in South Africa’s unemployment figures (with job growth in finance, construction and community-based sectors and job losses in mining, manufacturing and the trade sectors).
Fiscal policy and performance
Government’s key objective is to stabilise national debt (projected to stabilise at a higher 77.9% of GDP in 2025/2026 compared to the 76.2% projected in March 2025 and remain at broadly similar levels until 2028/2029) and limit debt service costs (to approximately 21% of revenue until 2027/2028).
Government intends to stabilise national debt by running increasing primary budget surpluses (from 0.5% of GDP in 2023/2024, to a projected 0.9% for 2025/2026, and up to 2,5% in 2028/2029). The current trajectory is positive as the primary surplus has increased from R33 billion in 2023/2024 to approximately R68,5 billion in 2025/2026, and is forecast to come in at about R224 billion in 2028/2029.
The main budget deficit is also projected to decline from 4.5% of GDP in 2025/2026 to 2.7% of GDP in 2028/2029.
Consolidated expenditure is expected to increase by 3.6% on average from 2025/2026 to 2028/2029 (with higher expenditure percentage increases for education, health, economic development, and debt service costs).
Increasing capital spending by 7.3 per cent annually is a step in the right direction (which reflects an orientation towards growth enhancing infrastructure spending).
The stabilising fiscal position has been recognised by a credit rating upgrade from S&P. Markets have also bought into this narrative. Bond yields on 10-year Government debt have declined from approximately 10.5% in early March 2025 to about 7.95% by mid-February 2026.
Government’s fiscal policy reforms are founded on the following:
- finalising a formal fiscal anchor in 2026;
- improving tax administration and strengthening revenue and debt collection (the debt collection target is set at R20 billion to R50 billion per year but challenging); and
- boosting efficiency and eliminating waste (intended to achieve at least R10 billion in savings over the medium term).
The 2025 Medium Term Budget Policy statement signaled ZAR20 billion of tax increases for 2026/2027 and projected gross tax revenues to be R19.7 billion higher than forecast in May 2025. On the other side of the equation main budget non-interest expenditure was forecast to increase by R15.8 billion in 2025/2026.
The projected gross tax revenue overrun is due to higher corporate income tax (R4.6 billion due to strong performance in the finance, electricity and trade sectors), dividends tax (R4.2 billion due to large once off dividends in the mining and retail sectors), VAT (R11.3 billion) and fuel levies (R2.0 billion). Revenue underperformance was noted in specific excise duties, personal income tax and customs duties.
Conclusion
Tax increases in 2026/2027 are likely to be implemented by way of fuel levy increases, road accident fund levy increases, increases in sin taxes, and not adjusting/fully adjusting personal income tax bands in line with inflation (with possible relief for lower income earners possible depending on tax revenue performance in 2025/2026).
Together with fiscal consolidation measures the South African economy has to be transitioned on to a significantly higher economic growth path (if South Africa is to reverse elevated debt to GDP ratios, reduce debt service costs as a percentage of Government revenue, and reduce unemployment).
Whilst the fiscus appears to be turning the corner the position has to be bolstered by continued growth enhancing reforms.
