Treasury's strong hand faces test of lasting fiscal reform

The Treasury enters South Africa’s mid-term budget holding an unusually strong hand: tax receipts running ahead of forecast, a primary surplus on the books and debt dynamics moving in the right direction. The harder question facing the institution is whether that momentum can be converted into a recovery that lasts, one anchored in faster growth, rising investment and a fiscal framework investors can trust.

The accountability test embedded in the medium-term budget policy statement (MTBPS) goes beyond updating the numbers. It must demonstrate how the state moves from stabilising its finances to expanding the economy’s productive potential, and it must convince the public that the gains are real and will be kept.

The improved revenue picture is led by corporate income tax, with personal income tax and domestic VAT also contributing. Estimates of the overrun against February’s budget vary widely, from under R10bn to about R40bn, depending on how nontax revenue, fuel-levy relief and other assumptions are treated. The outcome supports expectations of a narrower deficit and a continued primary surplus, meaning revenue exceeds spending before interest payments.

That distinction matters for oversight. A primary surplus does not eliminate the deficit, because the state must still service its interest bill, diverting money from public services and productive investment. Nor are all revenue gains equal. Stronger profits or favourable prices can lift receipts without changing the economy’s long-term potential, and durable consolidation requires a broader tax base, better-targeted spending and an economy that reliably generates higher incomes.

Meanwhile, markets are watching whether the Treasury trims weekly bond issuance, with a cut in competitive fixed-rate auctions from R2.55bn to R2.25bn under discussion. The department has room to act: revenue is stronger, funding has been raised ahead of schedule, auction demand is solid and switch auctions are smoothing future redemptions. Yet caution is warranted. Reduced issuance eases the supply investors must absorb, but running down cash reserves to borrow less today is not a lasting improvement in the public finances. The real test is whether lower borrowing reflects a genuine fall in financing needs.

The brighter picture has revived talk of rating upgrades. Analysts point to November 27 for Moody’s and S&P, and December 11 for Fitch. A Moody’s upgrade to Ba1 looks possible; an S&P move to BB+ is less certain. The distinction between local- and foreign-currency ratings is significant. An S&P upgrade to BB+ on foreign-currency debt could imply a BBB− rating on local-currency debt, restoring investment-grade status there and reopening the debate over benchmark inclusion, which could widen the investor base. Investment grade on foreign-currency debt remains a longer climb, demanding lower deficits, a falling debt burden and stronger trend growth.

The MTBPS is also an opportunity to clarify South Africa’s fiscal anchor, the commitment steering budget decisions towards sustainable debt. A principles-based anchor sets rules and objectives without fixing a single numerical target each year. Its appeal is flexibility: shocks are inevitable, and a rigid annual target can force damaging cuts in a downturn or encourage decisions designed only to hit a number. Flexibility carries a price, however. The public must be able to judge whether the government is delivering, which requires clear indicators, transparent reporting, independent scrutiny and a stated plan for corrective action if the path slips. Without those safeguards, principles become aspirations rather than constraints.

Weak growth remains the Achilles’ heel of the fiscal arithmetic. Slow expansion means sluggish wages and profits, limiting tax revenue, while unemployment stays high and interest payments swallow a large share of resources. The result is a vicious circle: weak growth constrains revenue, thin revenue limits public investment, and too little investment further damages growth, leaving debt ratios stubbornly high because the denominator grows too slowly. The causes lie beyond the budget itself: unreliable electricity, inefficient ports and railways, water constraints, regulatory uncertainty and skills shortages, with weak confidence and murky policy deterring investment.

Reform is essential but not sufficient. Fixed-capital investment in factories, machinery, energy infrastructure and logistics networks is central to raising output and productivity, creating demand now and expanding capacity later. Government can help by making infrastructure reliable, accelerating credible public-private partnerships, keeping regulation predictable and directing public investment to projects that unlock private capital. Tackling waste and corruption matters just as much; eliminating them would strengthen the public finances, restore investor confidence, build institutional strength and lift growth by drawing in more foreign and local direct investment.

The government of national unity carries a particular responsibility to reduce uncertainty. The Treasury cannot resolve every obstacle alone; creating the conditions for growth is a task for the whole of government, working with business and society. Nelson Mandela famously reflected: “I have discovered the secret that after climbing a great hill, one only finds that there are many more hills to climb.”

Stronger revenue, the prospect of better ratings and possibly lower borrowing are encouraging, but they are milestones, not the destination. The next hill is turning fiscal stability into a lasting expansion of productive capacity. That demands certainty from politicians, effective infrastructure from government, investment from business and continued compliance from taxpayers, conditional on better government efficiency and service delivery to uphold the social contract. The MTBPS need not promise transformation overnight; it must show the gains are real, explain how they will be kept, and set out a credible path to stronger growth. The most durable improvement will come not from collecting more tax or issuing fewer bonds, but from an economy in which more people work, more businesses invest and rising prosperity makes the debt burden easier to bear.

Grobler is a fixed-income strategist at Ashburton Investments.