[Opinion] The fly in the MTBPS ointment

The National Treasury revised its May economic growth forecast for 2025 down from 1.4% to 1.2%. The 2026 growth outlook was also downgraded, from 1.6% to 1.5%. Growth is then expected to rise to 1.8% in 2027 before reaching 2% in 2028, thus averaging 1.8% over the next three years. For comparison, the economy grew by 0.8% in 2023 and 0.5% in 2024.

If it materialises, the projected lift in the growth rates is good news for the country. A note of scepticism is warranted because the Treasury’s growth projections are regularly overoptimistic, often considerably so.

Still, higher growth will assist the Treasury in its efforts to get the country’s debt-to-GDP ratio to peak at 77.9% in 2025/26. Godongwana noted that this was the first time since the 2008 financial crisis that public debt would not grow as a percentage of GDP, noting that the Treasury expected debt to GDP to drop to 77% in 2028/29.

However, looking towards the future, the finance minister – and South Africa as a whole – need far higher growth rates. With the population growing at 1.1% per year, it will take a long time to lift real incomes and make a dent in joblessness if the economy is only growing at 1.8%.

Progress in achieving higher growth will be hampered by the struggle to attract more fixed investment, currently registering at around 15% of GDP when it should be closer to 30%. The Treasury is doing its part. But the Government of National Unity (GNU) has not yet shifted the needle on the policies that are deterring investment and higher economic growth.

Most significant

The finance minister’s statement confirmed the country’s most significant monetary policy change in 25 years: South Africa will now aim for a new 3% inflation target, with a 1 percentage point tolerance band. Inflation targeting will thus change from the current 3% to 6% band to a lower and narrower 2% to 4% band.

This has several positive implications. Lower inflation means lower nominal bond yields and therefore lower refinancing costs for South Africa’s sovereign debt. For every one percentage point drop in the bond yield, South Africa saves R25bn to R30bn per year in debt-service costs by 2028/29 – or up to R300bn cumulatively over the next decade.

Lower inflation is also strongly positive for South Africa’s households, which spend 60% to 70% of income on inflation-sensitive items on average. A permanent 1.5 percentage-point drop in consumer price inflation could add about 1% to 1.5% to real disposable income each year. Poor households benefit the most because food and energy make up an even larger share of their budgets.

Government revenue will be slightly negatively impacted by lower inflation because it means that nominal tax revenue grows more slowly and because lower inflation leaves less scope for “silent” tax increases by means of bracket creep. But this can largely be offset by faster economic growth and more formalisation of the economy.

Truly stunning

In what would prove to be a truly stunning achievement in the face of strong populist spending temptations, the consolidated budget deficit is forecast to fall to 2.9% in 2028/29 (from 4.7%). This assumes better political pushback against calls for public sector wage increases, policies such as the National Health Insurance, and holding the line on bailouts for state-owned enterprises. Another notable achievement will occur if the primary budget surplus (revenue exceeding non-interest expenditure) improves to 2.5% of GPD (or R224bn) in 2028/29, from 0.5% of GDP in 2023/24.

The MTBPS confirmed the government’s spending priorities: more than two-thirds of total expenditure goes to civil servant wages, social transfers, and debt-service costs. Health, education and social development are allocated R318.9bn in 2025/26. Transnet is offered new support to the tune of R145.8bn, pushing contingent liabilities to R707.8bn.

Preceded as it was by the first GNU leaders’ meeting in 177 days, the smooth MTBPS process along with some positive signals on the tapering of the debt trajectory will boost market and investor sentiment towards South Africa. This is important for the GNU’s credibility. Following Godongwana’s speech the Rand strengthened to R17.08 against the US$ (from R17.49 on 4 November), while the yield on South Africa’s 10-year government bond fell to around 8.72%, the lowest level since June 2021.

With that said, based on the forecast growth levels, the level of debt as a percentage of GDP will effectively continue to grow and crowd out productive, and in some cases necessary, spending. As of the 2025 MTPBS debt-service costs consume 21 cents of every Rand in revenue collected.

While the fact that the MTBPS was good on fiscal responsibility and signalling should not be glibly dismissed or sneered, it remains true that consolidated government expenditure is forecast to increase from R2.59-trillion in 2025/26 to R2.88-trillion in 2028/29; an average annual rate of 3.6%. The growth is not there to justify this spending trajectory.

The CRA has consistently stressed the need for higher levels of real fixed investment. On this front the MTBPS detailed that Treasury would issue an infrastructure bond of at least R15bn to attract private capital into public projects. Through the Budget Facility for Infrastructure (BFI) special window, “shovel-ready” projects will be targeted.

Remains to be seen

Whether the process is done in such a way that value for money and cost effectiveness are prioritised remains to be seen, along with necessary property rights protections. As a component of total expenditure, capital payments are penned to rise at 7.3% annually – the fastest-growing item. If done well (and not spurned on “non-value adding intermediaries”) this will be a key driver of future, higher growth rates.

On the risk side, on the back of improved tax collections and processes (revenue collected came in R19.3bn above the 2025/26 budget estimate), and a commodities tailwind paired with US Dollar weakness through 2025, South Africa’s policymakers may succumb to complacency, and the political will necessary to challenge and change South Africa’s glaring lack of strong-growth fundamentals may dissipate.

Article originally appeared here.