South Africa’s tight fiscal path
South Africa’s medium-term fiscal outlook, as articulated in the Medium-Term Budget Policy Statement (MTBPS) and the Medium-Term Expenditure Framework (MTEF), reflects a risk-weighted consolidation path aimed at restoring fiscal sustainability in the context of prolonged weak economic growth, a structurally elevated public debt burden, and persistent socio-economic pressures.
Under this baseline, gross public debt is projected to stabilise at around 77–78% of GDP before gradually declining, conditional on the realisation of modest growth assumptions and effective containment of fiscal risks. National Treasury, however, explicitly recognises that this consolidation path is highly sensitive to downside risks, including weaker-than-expected growth, higher interest rates, and persistent expenditure pressures emanating from the public-sector wage bill and state-owned enterprises.
As a result, South Africa remains locked in a low-growth, high-debt equilibrium that significantly constrains fiscal space and limits the scope for counter-cyclical policy. In this context, the central fiscal challenge extends beyond headline consolidation towards strengthening fiscal credibility, improving the quality and efficiency of expenditure, and safeguarding developmental impact within a tightly constrained medium-term resource envelope.
Deficits and debt dynamics
South Africa’s fiscal stance continues to be defined by persistent deficits and a structurally high public debt burden, reflecting deep-seated imbalances between revenue mobilisation, expenditure commitments and economic growth.
The 2025 National Budget confirms that consolidated government expenditure continues to exceed revenue despite efforts to contain non-interest spending and strengthen tax administration. For the 2025/26 fiscal year, consolidated expenditure is projected at approximately R2.4 trillion, while revenue is estimated at around R2 trillion, leaving a substantial financing gap.
The consolidated budget deficit for 2024/25 is estimated at approximately 4.7–4.8% of GDP, a level that remains elevated relative to what is required to stabilise public debt in a low-growth economy. While improved from pandemic-era peaks, the deficit remains well above pre-2019 norms, reflecting entrenched structural drivers such as subdued potential growth, high unemployment and rigid expenditure components, including the public-sector wage bill and social transfers.
Rising public debt
Public debt dynamics remain the most significant medium-term risk to fiscal sustainability. Gross public debt has risen sharply over the past decade, with the Organisation for Economic Co-operation and Development (OECD) reporting an increase in South Africa’s debt-to-GDP ratio from approximately 31.5% in 2010 to an estimated 77% in 2025.
This debt accumulation has translated into escalating debt-service costs, with interest payments now absorbing more than 20% of main budget revenue. Debt service has become one of the fastest-growing expenditure items, crowding out allocations for infrastructure, human capital investment and growth-enhancing spending.
Growth constraints and political economy
Weak economic growth remains the binding constraint on fiscal sustainability. IMF projections place real GDP growth at 1.3% in 2025 and 1.4% in 2026, well below levels required to expand employment, broaden the tax base or stabilise debt through growth alone.
Structural bottlenecks, including energy constraints, logistics inefficiencies, labour-market rigidities and subdued private investment, continue to suppress potential growth. While reforms in electricity generation and port operations have yielded incremental gains, their macroeconomic impact remains limited in the near term.
Fiscal policy is further constrained by political economy realities. The 2025 reversal of the proposed VAT increase illustrates the narrowing scope for politically feasible revenue measures in an environment characterised by high inequality, unemployment and fragile household welfare.
Beyond orthodox consolidation
With low growth and rising debt-service costs, traditional consolidation tools face diminishing returns. In this context, fiscal sustainability increasingly depends on improving spending quality rather than reducing spending volumes. This highlights the limits of orthodox consolidation strategies focused solely on headline fiscal metrics.
Outcomes-based partnerships have therefore gained renewed attention as instruments to improve efficiency under tight fiscal conditions. By paying for results rather than inputs, such mechanisms shift performance risk and enhance accountability. While not a substitute for macro-fiscal discipline, outcomes-based approaches can help maximise social and economic returns within constrained budgets, particularly in sectors such as education, health, skills development and labour-market activation.
Conclusion
South Africa’s fiscal outlook is characterised by high public debt, persistent—though narrowing—deficits, and weak economic growth. While consolidation remains necessary, restoring fiscal sustainability will depend on credible reform, growth-enhancing structural changes, and a results-driven approach to public finance that safeguards developmental outcomes and public trust.
Reproduced with the permission of Economic Business Insight.
Daniel Makina and Rogers Dhliwayo are respectively managing and economics editors of the magazine.
