Restoring confidence and driving growth: South Africa’s 2026/27 Budget crucial to economic recovery

Improved economic outlook and growth prospects

South Africa's economic recovery is slowly gaining momentum. The economy is now projected to grow by 1.4% in 2025, an improvement from the 1.2% estimated in the 2025 Medium-Term Budget Policy Statement (MTBPS). Looking ahead, the economic outlook has been moderately enhanced, with growth expected to reach 1.6% in 2026 and real GDP growth forecast to reach 2% by 2028. This growth is supported by ongoing structural reforms, rising business and investor confidence, lower interest rates, and increased investment. Additionally, inflation expectations are decreasing and  aligning more closely with the 3% target.

Despite some positive trends, several challenges remain. Logistical bottlenecks, declining public infrastructure, and the recent outbreak of foot-and-mouth disease continue to hinder economic activity and pose risks to the overall outlook. Additionally, growth is still below the levels needed to significantly reduce unemployment and generate enough revenue to expand social and economic services.

Balancing consolidation, debt reduction, and service delivery

Fiscal policy seeks to carefully balance the need to reduce the budget deficit and lower debt while also fulfilling the responsibility to protect public services and support the economy. The consolidated budget deficit is expected to decrease over the medium-term expenditure framework (MTEF) period, falling from 4.5% of GDP in 2025/26 to 3.1% in 2028/29. For the first time since the global financial crisis of 2008, the gross debt-to-GDP ratio is stabilising, with national government debt projected to hold steady at 78.9% of GDP in 2025/26. This stabilisation is partly due to lower inflation and, as a result, weaker nominal GDP growth. Improved confidence in South Africa’s fiscal outlook has led to a sovereign ratings upgrade and lower borrowing costs, which provide additional fiscal space debt-service costs are also expected to reach their highest point in the current financial year and decrease in future years. 

Tax system: Efficiency, fairness, and targeted relief

The government is committed to maintaining a tax system that is efficient, fair, and simple. Gross tax revenue for 2025/26 has been revised upwards by R21.3 billion compared to the 2025 Budget. This is due to increased value-added tax (VAT), corporate income tax and dividend tax collections.

Despite challenging economic conditions, South Africa’s tax system has performed well, with the tax-to-GDP ratio increasing to 25.9% in 2025/26 from 25.1% in 2024/25. For the first time since the 2023/24 financial year, personal income tax brackets and medical tax credits will be fully adjusted for inflation. This means that, if taxpayers receive an inflation-linked salary increase, they will not fall into a higher income tax bracket (known as bracket creep).

The compulsory VAT registration threshold has been increased from R1 million to R2.3 million, providing small businesses some relief from the administration burden of VAT compliance.

Illicit trade remains a large concern for the South African fiscus and endangers the growth and stability of the economy. Having a robust and modernised tax system is essential to combat this challenge. We would have liked the minister to expound further and provide more detail on the plans to curb illicit trade.

When looking at increasing tax revenues, we also would have expected more comment in the budget speech on the implementation of an electronic invoicing system to prevent fraudulent VAT claims, under declaration of VAT to expand the VAT tax base. The South African Revenue Service was planning to implement this system by 2028, but progress on the details of what would be implemented is taking longer than expected. Given the success in other countries across the continent, it is essential that this system is introduced as soon as possible. 

Structural reforms and strengthening state capability

The government continues to implement structural reforms and enhance state capability through the joint strategic initiative between the Presidency and  National Treasury termed Operation Vulindlela. Now in its second phase, this initiative is focused on unlocking economic growth by accelerating reforms in key sectors. Significant progress has been made in the electricity sector, with regulatory approvals and institutional developments advancing the transition to a competitive electricity market. Transnet has maintained improved operational performance, reflected in higher rail volumes and ongoing fleet renewal. A major milestone was achieved with the signing of the long-term concession agreement for Durban Container Terminal Pier 2, unlocking investment in port capacity and technology.

The National Water Resources Infrastructure Agency is expected to begin operations in 2026, supporting increased maintenance and investment in water infrastructure. To strengthen state capacity, the government has allocated performance-based grants to seven qualifying municipalities under the Metro Trading Services Reform, aimed at improving management accountability, financial transparency, cash flows, and infrastructure maintenance. These structural reforms are critical for stabilising operations in the electricity and logistics sectors, which are essential for reversing economic decline. 

Infrastructure investment and public-private partnerships

South Africa’s infrastructure deficit continues to limit productivity and increase the cost of doing business, particularly through transport bottlenecks, water insecurity, and uneven municipal service delivery. High levels of investment in public infrastructure are fundamental to long-term economic growth, improved service delivery, job creation, and climate resilience. As announced in the 2025 MTBPS, the government is managing risks by increasing spending in 2025/26 for strategic public infrastructure projects.

In 2025, the government issued its first sovereign infrastructure and development finance bond, raising R11.8 billion at favourable rates, reflecting strong market interest in financing public investment projects. These funds will be ring-fenced for strategic capital projects, based on a rigorous assessment process by the Budget Facility for Infrastructure.

There are currently 63 public-private partnership (PPP) projects at various stages of development: 17 in inception, 32 in feasibility, and 14 in procurement. Among the most advanced is the six border posts project, which will ease congestion, boost regional trade flows, and upgrade key inland border posts. PPPs provide a viable alternative for public entities to undertake projects, even in a fiscally constrained environment.

The operationalisation of the Infrastructure Finance and Implementation Support Agency (IFISA) on 1 April 2026 will be a key enabler in further growing the PPP project pipeline.

In recognition of the importance of data and artificial intelligence in the economic development of South Africa, the government is exploring options to bolster investment in data infrastructure. This will be critical in accelerating the country’s digital transformation.

National Treasury has developed a debt sustainability model to assess risks to the baseline fiscal framework. While it is not possible to provide precise assessments of future outcomes, this tool offers risk-adjusted projections under different scenarios, supporting sound fiscal decision-making. The model is not used to determine fiscal policy, but rather to indicate the likely trajectory of debt under various growth scenarios and the fiscal effort required to maintain sustainability. Under current economic conditions, the model suggests that the government’s approach is sufficient to keep debt on a declining path and to build buffers against shocks, implying that even significant shocks would not derail the path to debt stabilisation.

Looking ahead: sustaining momentum for a resilient and equitable future

As Deloitte’s subject matter specialists projected, the 2026 budget will play a crucial role in South Africa's economic recovery, focusing on fiscal sustainability, structural reforms, financial stability, and controlling inflation. This perspective was echoed by President Cyril Ramaphosa in his State of the Nation Address, where he emphasised that the nation is in a stronger position than it was a year ago, with economic growth showing promising signs of momentum. By building on this positive foundation, South Africa has the opportunity to foster a more resilient and equitable society, enhancing its position on the global stage. Having made significant progress, it is now essential to sustain this upward trend and further accelerate the country’s development efforts.