Last week’s budget embodies continuity. First, continuity in the fiscal strategy of pursuing growing primary budget surpluses and credibly reaching a peak in the government debt-GDP ratio this year.
The National Treasury had already committed to putting South Africa on a more sustainable fiscal path several years ago. In Budget 2026, while the ratio was once again higher than previously forecast, the timing of this peak has not shifted; the debt-GDP ratio peak will be in this fiscal year.
Bond investors and rating agencies had for a long time been unduly sceptical about achieving this milestone. Now, they too are more optimistic that this turning point is playing out, as reflected in the recent bond market rally and sovereign credit rating upgrade. Further improvement in the budget deficit will come from containing expenditure, not hiking taxes.
There are, of course, several risks to the fiscal outlook over the medium term, but we reached an important milestone last week. The fiscal anchor that the Treasury said it will announce in the medium-term budget policy statement will be critical to ensure that future administrations will also commit to a sustainable fiscal path.
Second, the Treasury’s pursuit of an improvement in the quality of fiscal spending is proving continuous. Most pertinently, there has been an ongoing shift towards more infrastructure, rather than consumption, spending — which the Treasury regards as an employment-intensive growth impetus.
Indeed, in Budget 2026, infrastructure spending was increased by more than R30bn from the 2025/26 fiscal year to the 2027/28 fiscal year (relative to Budget 2025). Specifically, spending on water and transport infrastructure was increased by the most.
These reforms usually prove protracted. Typically the benefits of these reforms manifest only years down the line
This should alleviate these two major disruptions to ordinary South Africans, which are also impediments to economic growth.
Besides increasing infrastructure spending, several mechanisms are being employed in the pursuit of accelerating infrastructure spending — from a planned credit guarantee vehicle to revisions to the public-private partnership (PPP) regulations to ease their bureaucratic burden to increased support for private sector participation by the department of transport’s private sector participation unit and the Water Partnership Office. While this too will take time, there are already some encouraging green shoots.
Third, Operation Vulindlela reforms, steered jointly by the Treasury and the Presidency, have seen continuous support. Besides the fiscal support for the ring-fencing of municipalities’ trading services (such as water and electricity), including a large incentive grant, the Treasury announced several reforms in Budget 2026 that it regards as a “structural” change that will see the national government move from “oversight to active structural intervention”. This includes legislative reforms to compel municipalities to have funded budgets while also creating more intervention mechanisms for national and provincial government.
It also includes governance reforms to support earlier intervention and consequence management by the national government for municipalities in financial distress. Further, there are technical reforms, such as the smart meter grant programme, which should improve municipalities’ billing accuracy while providing them with real-time data to detect leaks and illegal connections. A new legislative clause should enable the Treasury to redirect infrastructure grants from non-performing municipalities to indirect, rather than direct, support.
As aptly demonstrated by the lag from changes to electricity regulations to the cessation of load-shedding and the lag from the Treasury’s initial announcement that it would restore South Africa’s fiscal sustainability with debt-stabilising (primary) budget surpluses to the peaking of the government’s debt-GDP ratio, these reforms usually prove protracted. Typically the benefits of these reforms manifest only years down the line. However, there is, in our assessment, enough traction with these reforms to underpin a credible expectation that economic growth and key fiscal metrics will improve materially in the years ahead.
The bond market concurs, as aptly reflected in the significant decline in South Africa’s long-term bond yields (to 8% now, from 11% early in 2025 and a spike to 12% in 2024, though other factors are at play too). Credit rating agencies too are more optimistic about South Africa’s prospects than in many years, with likely further positive rating action in view now after S&P’s upgrade of the country’s sovereign credit rating last year.
We foresee a virtuous cycle as the reform efforts over the last few years are now starting to deliver dividends, even though there is still a long reform road ahead.
• Moolman is Standard Bank Group’s head of South Africa macroeconomic research
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