Source: The Conversation – Africa – By Andrew Robert Donaldson, Senior Research Associate, Southern Africa Labour and Development Research Unit, University of Cape Town
In presenting the 2026 national budget to South Africa’s parliament on 25 February, finance minister Enoch Godongwana characterised this as the turning point in South Africa’s public finances – heralding improved confidence, increased growth and rising infrastructure investment.
For over a decade, the size of the deficit and the rise in public debt have been central themes in the annual budget.
This year, analysts have welcomed the apparent turnaround in the budgetary outlook. Debt has peaked at just under 80% of GDP. And for the first time in a decade, the Treasury projects that interest on debt will increase more slowly than spending on education or health.
This is a transition that goes back to May 2025, when the rand began to strengthen against the US dollar in the turbulence that followed US president Donald Trump’s April tariff announcements. The South African Reserve Bank’s commitment to lower inflation and Parliament’s opposition to value added tax increases reinforced market sentiment that inflation would be kept in check. Around this time, 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 national treasury’s projected decline in debt service costs as a percentage of GDP. It expects these to fall from 5.4% this year to 5.2% in 2028/29.
But for the economic outlook to improve decisively, growth must rise. It is projected to increase, but not by much: 1.4% in 2025 and 1.6% in 2026, and then 2% by 2028. The recovery is still very fragile – gross fixed-capital formation, which should be upwards of 25% of GDP, is just 14%. Unemployment is still above 30% of the labour force. And the budget deficit for the year ahead (the difference between expenditure and revenue) is still uncomfortably high at 4% of GDP.
As an economist, I would argue that, 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, several of which form part of the Presidency’s Operation Vulindlela programme, launched in 2020. These include:
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electricity sector restructuring
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modernisation of state transport utility Transnet and logistics networks
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investment in digital infrastructure and an e-visa system
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boosting export competitiveness.
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.
These initiatives will take time to shift the economic growth outlook.
What still needs to be done
Operation Vulindlela recognises that improvements in state capability are priorities of phase 2 of the presidency’s programme. There is a renewed focus on local government. This includes 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.
Deterioration in local infrastructure is increasingly evident in water supply, roads and local services in many municipalities.
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.
Read more: South African politicians, not bureaucrats, stand in the way of a professional civil service
Is state capability perhaps the key turnaround needed for an improved growth outlook?
The 2026 Budget Review signals a more robust, interventionist approach of the National Treasury to dysfunctional provincial departments and municipalities.
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”. Its aim is to improve billing accuracy and address leaks and illegal electricity connections.
But substantial improvements in state capability will not be achieved by top-down interventions and technology projects alone. Substantial reallocations of state resources are also needed. Simply put, resources must be redirected from unproductive to productive activities.
This is where the Treasury’s “targeted and responsible savings” initiative comes into play. Expenditure reviews have been under discussion for several years; in the 2025 medium term budget policy statement the savings programme was introduced to give this practical effect. The 2026 budget includes R4 billion (US$250 million) a year in identified savings.
That is not enough. It is 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 while lowering the budget deficit. The targeted and responsible savings initiative is also about shifting resources towards the investment, infrastructure maintenance, housing, police and court services that need to be strengthened. A bolder approach is needed. The goal should be R100 billion (US$6.3 billion) a year.
This means a targeted reconsideration of the “architecture” of the state.
What needs to be fixed
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.
Sector Education and Training Authorities (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 paid to them by employers 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 20 years since reform proposals were set out for the Road Accident Fund. It has an unfunded liability of around R400 billion (US$25 billion) arising from road accident compensation claims that have yet to be settled. It should be restructured as a capped benefit scheme, with the balance of cover left to insurance providers.
Unemployment Insurance Fund expansion of mandate: The fund is planning to expand its administrative staff from 3,424 in 2024/25 to 11,424 next year. It also intends to expand 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.
Southern African Customs Union transfers: Review of the customs union agreement is long overdue. Its formula-based distribution of over R78 billion (US$4.9 billion) to neighbouring countries next year no longer rests on a defensible rationale from either a trade or regional development perspective.
More broadly, the 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. Public entity 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.
Tighter expenditure control can in part be done through existing provisions of the Public Finance Management Act. More complete implementation might require fiscal responsibility legislation.
Read more: South Africa’s debt has skyrocketed – new rules are needed to manage it
The Treasury’s plan for fiscal sustainability is to introduce a principles-based “fiscal anchor” that will require each new administration to table a medium-term plan to ensure that debt service costs do not erode service delivery capability. If the expenditure planning system is not extended to include public entities, this will be a toothless tiger.
A version of this article first appeared on the Southern Africa Labour and Development Research Unit (Saldru) website.
– South Africa’s economy is picking up, but hasn’t reached a turning point yet – economist
– https://theconversation.com/south-africas-economy-is-picking-up-but-hasnt-reached-a-turning-point-yet-economist-277263