Finance minister Enoch Godongwana’s 2026 budget has illustrated that the narrower, lower inflation target of 3% announced in the medium-term budget policy statement played a significant role in improving South Africa’s economic prospects.
Along with rising commodity prices, stabilising debt as a percentage of GDP and receding inflation, the budget put the country on a better footing due to a tighter inflation target by the South African Reserve Bank.
After the tabling of the budget, the rand immediately strengthened to about R15.85 against the dollar. Godongwana, with the help of SARS commissioner Edward Kieswetter and SARB governor Lesetja Kganyago, presented a budget with tax relief and a solution to inflation.
Godongwana announced during the medium-term budget policy statement in November last year that the SARB’s official inflation target would be adjusted from a band of 3%-6% to a target point of 3%.
The budget was also positive in that after two years with no inflationary relief, personal income tax brackets and medical tax credits will be fully adjusted for inflation.
In the foreword of the Budget Review, National Treasury director-general Duncan Pieterse said consistent fiscal discipline, along with government’s decision to reduce the inflation target, has improved investor perceptions and narrowed the risk premium investors attach to South Africa.
The combined benefits of this approach are evident in the decline in government’s borrowing costs and a more favourable environment for private investment, he said.
During the tabling of the budget, Kieswetter got a rare standing ovation after Godongwana told the joint sitting that revenue collections for 2025/26 are projected to be R28.8bn higher than the 2025 budget estimate.
Speaking to reporters at a briefing ahead of the budget speech on Wednesday, Kganyago said that while he spent a long time championing the new inflation target, it exceeded even the central bank’s most optimistic expectations.
“When we went out with a paper, we expected that the impact would be a move in bond yields of about 200 basis points, we expected that the currency would strengthen, and we expected that the risk premium would decline, that’s including the risk profile of the country.
“You can go back and look at that paper. But what we now have calculated is that from December 2024 to date, bond yields in South Africa have gone down by a good 400 basis points. That is significant…It turned out to be better than what we had expected.”
He said inflation expectations were converging towards the inflation target.
“And what we have seen is that in December … that inflation expectations were at the lowest since we started surveying inflation expectations in South Africa.”
Pieterse said due in large part to the tighter inflation target, by 2028/29 South Africa’s debt stock would be R277bn lower in this budget relative to the medium-term budget policy statement, and R47.6bn of that would come from lower lead elevations of South Africa’s inflationary bonds.
Ultimately, Godongwana nailed a tough balancing act of tax relief, stabilising grant provisions, modest fuel price controls and efforts to cushion households and small businesses in the midst of enduring tough times.
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