The 2026 Budget: Is this the turning point?

In presenting the 2026 Budget to Parliament, Minister Godongwana characterised this as the turning point in South Africa’s public finances – heralding improved confidence, increased growth, and rising infrastructure investment.

In the Treasury’s debt and financial projections, there is a clear turnaround. Debt has peaked at just under 80% of GDP, and for the first time in more than a decade interest on debt is projected to increase more slowly than spending on education or health.

This is a transition that goes back to May last year, when the rand began to strengthen against the dollar, inflation expectations fell below 4.5%, and the 10-year government bond yield began an extraordinary decline from its 11% peak to around 8% today. These are the financial trends that account for the projected decline in debt service costs as a percentage of GDP from 5.4% this year to 5.2% in 2028/29.

Economic growth is projected to rise, but not by much: 1.4% in 2025 and 1.6% in 2026, increasing to 2% by 2028. So the recovery is still very fragile – gross fixed-capital formation is just 14% of GDP, unemployment is still above 30% of the labour force, and the budget deficit for the year ahead is still uncomfortably high at 4% of GDP.

If growth is the metric that counts, this is not yet the turning point that will deliver rising living standards and jobs for all. Growth depends, in the Treasury’s analysis, on continued implementation of structural reforms: electricity sector restructuring, modernisation of Transnet and logistics networks, investment in digital infrastructure, and boosting export competitiveness, amongst others. The Budget Review presents a summary of progress: 62% implementation of electricity reforms, 33% in transport, 11% in the water sector, 67% in telecommunications, 75% in reform of the visa system.

So the recovery in growth will take time. Improvements in state capability are key priorities of phase 2 of the Presidency’s Operation Vulindlela programme. There is a renewed focus on local government, including a proposed shift to a “utility model” for water and electricity services in which these functions will be run “like businesses”, to ensure proper infrastructure maintenance and accountability to the public. The Treasury also hopes that the implementation of the Public Service Amendment Bill will lead to improvements in professional standards in government, and particularly in municipalities.

Is this perhaps the key turnaround in the performance of government? The 2026 Budget Review signals a new approach of the National Treasury to dysfunctional provincial departments and municipalities. 

“National government is now moving from oversight to active structural intervention…”  

This will include centralised control of payroll and headcounts, enforcement of financial recovery plans, and stricter conditions attached to financial flows to provinces and municipalities. It also includes technological reforms, such as the “smart meters grant programme” to improve billing accuracy and address leaks and illegal electricity connections.

But substantial improvements in state capability are unlikely to be achieved by centralised interventions alone. Substantial reallocations of state resources are also needed. This is where the Treasury’s “targeted and responsible savings” (TARS) initiative comes into play. So far, it has achieved almost nothing. The 2026 Budget includes R4 billion a year in identified savings – less than 0.1% of GDP, and just 1.1% of the gap between government expenditure and revenue. It’s not just that savings must be found if tax increases are to be avoided. The TARS initiative is also about shifting resources from unproductive to productive applications. A bolder approach is needed. The goal should be R100 billion a year. 

This means a targeted reconsideration of the “architecture” of the state. Here are some of the dysfunctionalities that must be addressed:

• Two-tier local government: District municipalities serve no discernible democratic purpose. Where they provide cross-boundary services, these can be organised as utilities owned by and accountable to their component local municipalities.

• SETAs and the National Skills Fund: Once again, the Treasury has signalled its intent to “review” the skills funding system. SETAs should be liquidated and the levy abandoned. They are costly and inefficient intermediaries: the levy relief would be a benefit to businesses, allowing them to finance training as needed, not subject to one-size-fits-all rules and bureaucratic processes.

• The Road Accident Fund: It is more than twenty years since reform proposals were set out for the Road Accident Fund: it should be restructured as a capped benefit scheme, with the balance of cover left to insurance providers.

• UIF expansion of mandate: The Unemployment Insurance Fund is planning to expand its administrative staff from 3,424 in 2024/25 to 11,424 next year, while extending its activities from payment of unemployment benefits to provision of skills audits, employment subsidies, and enterprise support. Its reported expenditure increased from R26.0 billion in 2024/25 to R48.8 billion in 2025/26. The Treasury should simply say No. It is absurd that public health and education programmes are subject to strict spending controls while a fund administered by the Department of Employment and Labour is allowed free rein.

• SACU transfers: Review of the Southern African Customs Union agreement is long overdue – its distribution of over R78 billion to neighbouring countries next year no longer rests on a defensible rationale from either a trade or regional development perspective.

More broadly, the key budget reform that is needed is to extend Treasury’s expenditure planning and control systems to cover the 196 public entities that perform statutory functions and rely on fiscal revenue but fall outside the expenditure control limits of the budget process. Their boards and executive staff are often paid more than senior departmental officials, their programmes are not subject to Treasury review, and in many cases they hold funds that should properly be controlled by the Treasury. 

The Treasury’s plan for long-term fiscal sustainability is to introduce legislation to require new administrations to table medium-term fiscal plans. If the expenditure planning system is not extended to include public entities, this will be a toothless tiger.