A Step Toward Solvency: Godongwana’s 2026 Budget Balances Middle-Class Relief with Fiscal Reality

In a fiscal performance that suggests South Africa is finally turning the corner from the “crisis years,” Minister of Finance Enoch Godongwana delivered a 2026 Budget Speech today defined by a return to fiscal discipline and a long-awaited reprieve for the productive middle class. Standing at the podium of the Parliament Dome, the Minister framed 2026 as a year of “entrenching credibility,” supported by the nation’s removal from the FATF grey list and its first credit-rating upgrade in sixteen years.

For the conservative observer, the headline story is not just the relief but the underlying shift in the possible macro-fiscal trajectory.

Macro Outlook: Outperforming the Assumptions

The Treasury’s updated projections offer a stark, positive contrast to the cautious assumptions made in May 2025. While global growth is pegged at 3.3% for 2026, South Africa’s domestic story is one of gradual acceleration, yet still noticeably slower than the global economic growth. Real GDP growth for 2026 is now projected at 1.6%, a notable revision from the 1.4% estimated in mid-2025. By 2028, the Treasury expects the growth engine to reach 2.0%.

More impressively, the fiscal consolidation strategy appears to be bearing fruit. The consolidated budget deficit for 2025/26 has been revised down to 4.5% of GDP (from the 4.8% projected in 2025), with a target of 3.1% by 2027/28.

Table 1: The change in macro variables from May 2025 to February 2026

Perhaps the most vital “fiscal anchor” for investors is the debt-to-GDP ratio. Gross debt is now expected to stabilise at 78.9% this year—lower than previous fears—and is forecast to fall to 77.3% in 2026/27. With a main budget primary surplus of 0.9% (climbing to 2.3% by 2028/29), the State is no longer borrowing to fund its daily operations at this stage.

The impact of these changes in budget deficit, government debt and economic growth can be seen in

Table 2: 2025 projections vs 2026 projections

Middle-Class Reprieve and the End of “Bracket Creep”

For the South African salary earner, the most significant news was the withdrawal of the R20 billion in provisional tax increases that were mooted in 2025. Instead, the Minister announced a full inflationary adjustment to personal income tax brackets and medical aid credits.

This move effectively adjusts salaries for “bracket creep,” in which inflation-linked raises push workers into higher tax brackets without increasing their real purchasing power.New Personal Income Tax Brackets (2026/27 Fiscal Year)

To illustrate this relief in a practical example, consider the following table:

While this relief is welcome, the Minister was quick to “claw back” a portion of it through indirect taxes. Sin taxes on alcohol and tobacco will increase in line with inflation, while the General Fuel Levy will rise by 9c/l for petrol and 8c/l for diesel. When combined with a 7c/l increase in the Road Accident Fund (RAF) levy and carbon fuel levies, the “tax reprieve” for motorists is somewhat diluted by the rising cost of logistics.

The Business of Growth: VAT and SME Incentives

From a conservative, pro-business standpoint, the adjustment of the VAT registration threshold from R1 million to R2.3 million is a masterstroke of deregulation. This tripling of the threshold frees thousands of SMEs from the administrative stranglehold of VAT compliance, allowing them to focus on expansion rather than paperwork.

Furthermore, the Capital Gains Tax (CGT) exemption for older persons selling a small business has been hiked from R1.8 million to R2.7 million, applying to businesses with an asset value of up to R15 million. These measures, alongside an increase in the annual tax-free investment limit to R46,000, signal a government that is finally beginning to incentivise capital formation and individual savings.

Allocations: Spending on the Essentials

The 2026 Budget allocates a staggering R2.67 trillion in total spending. The division of revenue remains heavily weighted toward the provinces, which manage the bulk of service delivery:

• National Government: 48.9% (R951.7 billion)
• Provinces: 41.7% (R810.5 billion)
• Local Government: 9.4% (R182.3 billion)

In terms of sectoral priorities, Education remains the largest component at 23.7% of consolidated expenditure, while Peace and Security will see spending rise to R291.2 billion by 2028/29. Notably, the Border Management Authority receives an additional R990 million to fill 738 critical positions—a move essential for national sovereignty and economic security.

Infrastructure: The Trillion-Rand Pipeline

The Minister confirmed a massive R1 trillion infrastructure pipeline over the medium term. The bulk of this R577.4 billion will be driven by state-owned companies and public entities, with a focus on restoring rail capacity for Transnet (targeting 77 million tonnes on the coal line) and SANRAL’s maintenance of 27,000 km of roads.

However, this infrastructure push comes with a “green” caveat. The government is moving ahead with Phase 2 Carbon Levies, increasing the rate from R236 to R308 per tonne of carbon,  a near 30.5% increase in carbon tax penalty for the year. Companies that fail to meet their 2030 targets will face a punishing penalty rate of R640 per tonne for excess emissions. For the industrial sector, the message is clear: the cost of carbon is no longer a theoretical risk, but a core operating expense.

The Frontier: Crypto and Capital Flows

Finally, the Minister addressed the digital frontier, announcing draft regulations under the Currency and Exchanges Act. This will integrate Crypto Assets into capital flow management and introduce stricter Anti-Money Laundering (AML) measures. This move aims to protect the integrity of the financial system while positioning South Africa as a regional hub for the modern data economy.

The Bottom Line and takeaway

The 2026 Budget is a pragmatic blueprint that prioritises debt stabilisation and middle-class relief over populist spending. By withdrawing the R20 billion tax hike and deregulating the SME VAT threshold, the Treasury has placed the ball firmly in the private sector’s court. The challenge now remains the efficient execution of the R1 trillion infrastructure plan—and ensuring that “sin taxes” and carbon levies do not stifle the very growth the Minister seeks to ignite.