Budget 2026: The pieces are falling into place

In summary:

• While the underlying fiscal stance remains broadly unchanged from last year, the backdrop to the 2026 Budget is very different.
• The Budget offered something for everyone, including some relief for taxpayers.
• South Africa is making progress on fiscal consolidation and faster economic growth, with markets recognising this positive shift.

The South African Finance Minister opened the 2026 Budget Speech by noting a long list of challenges over recent years, including state capture, the pandemic, ratings downgrades, grey listing, rising government debt and more. As he noted, “warning lights were flashing,” but these multiple crises were turned into a catalyst for change. As a result of much-needed reforms, the picture is a lot better today, which makes the Budget less of the “make-or-break” event it was in past years. The country might be re-entering a period of boring budgets – which would be fantastic – though of course we are also now in the age of coalition governments, introducing a new dimension of uncertainty. Partly for this reason, Treasury is finalising legislation that will bind future governments to long-term fiscal sustainability. This so-called fiscal anchor will enhance policymaking credibility, much like inflation targeting gives clarity to monetary policy.

Global backdrop
It is easy to get lost in the myriad tables and charts of the Budget and miss the broader context. There are at least four global elements to consider. The first is the resilience in the global economic outlook, despite immense policy uncertainty coming from the US. Supply chain managers are again grappling with the implications of the recent Supreme Court ruling. The International Monetary Fund projects growth of 3.3% this year, roughly the same as last year and in line with the long-term average. The war in Iran could derail this outlook, but it is really too soon to tell. A short-term spike in oil prices will cause little lasting damage, but a prolonged increase will put downward pressure on global growth and some upward pressure on inflation.

Secondly, and somewhat surprisingly, capital flows to emerging markets have increased, driven in part by a weaker dollar and a search for diversification on the part of international investors. This has resulted in a compression of “spreads”, or the higher borrowing costs these countries must pay relative to the US and other developed countries. South Africa has been a major beneficiary of this, with the rally in local bonds further supported by last year’s formal shift to a lower inflation target, and with it, an outlook for structurally lower interest rates.

This delivered unprecedented returns from bonds for investors last year, but from the Finance Minister’s point of view, it results in significant long-term relief. It can now borrow at around 2.5 percentage points less across the yield curve than at the time of the 2024 Budget and will also be able to roll over maturing debt at these lower costs. This is important specifically because there are significant maturities in the next three years. National Treasury director-general Duncan Pieterse noted that debt stock would be R277 billion lower by the 2029 fiscal year compared to what was projected in the November Medium Term Budget. This means that there will be less bond issuance, which should support bond prices all else being equal, and also significant savings on interest payments.

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