Written by Bongani Makgoba, MaxProf Senior Auditor

South Africa’s 2026 National Budget Speech, presented by Finance Minister Enoch Godongwana on 25 February 2026 outlined the government’s fiscal priorities against a backdrop of stabilizing public debt, limited economic development, and an ongoing municipal financial crisis. The budget sent a clear message about the commitment of more than R1 trillion to infrastructure and comprehensive reforms targeted at improving municipal revenue management and service delivery. When combined, these actions have the potential to drastically alter municipal operations, budgets, and long-term financial viability.

Key Budget Changes at a Glance

The budget for 2026 was based on a higher degree of planned spending and fiscal consolidation. This will be helped by the projected stabilization of government debt and the support of stronger revenue collection. Importantly, there has been no increase in the VAT rate, which in turn will provide strong relief to households and businesses, while maintaining revenue stability.

With ongoing investments in social grants, healthcare, and education, social spending remains fairly unchanged. However, funding for infrastructure and a firm involvement in municipal financial management represent a key strategic change that begins to recognize that effective local government is critical to public trust, private sector trust, and economic success.

Over R1 Trillion for Infrastructure Investments

The government has committed more than R1 trillion to infrastructure spending over the medium term. This includes national, provincial, and municipal projects focused on road maintenance (SANRAL), passenger rail recovery (PRASA), energy transmission expansion, and bulk water projects. For municipalities, this allocation represents both opportunity and obligation.

Municipalities have the potential to gain from increased investment for waste management facilities, roads, sanitation systems, bulk water infrastructure, and improvements to energy distribution. These expenditures are essential, especially in light of the huge backlogs in infrastructure and maintenance issues that many local governments are facing.

However, the funding for these capital infrastructure projects will be more closely linked to planning, implementation, and performance targets. It will be expected of municipalities to link infrastructure plans with long-term integrated development objectives, exhibit strong financial management, and offer realistic project timelines. Non-performance and omission of this may result in delayed or redirected funding as a result of inadequate planning or implementation.

Operationally, this means municipalities need to strengthen project management units, improve procurement controls, and ensure that capital budgets are realistic and fully funded, with little exposure to unauthorized, irregular, and fruitless and wasteful expenditure.

Municipal Reform: Revenue Must Fix Services

While infrastructure funding is significant, the most transformative aspect of the budget lies in municipal reform.

The National Treasury has made it clear that the current municipal funding model is unsustainable. A majority of municipalities are experiencing financial distress, largely due to poor revenue collection, weak governance, and failure to reinvest service-generated income into the infrastructure that supports those services.

A major component of the reform plan is ring-fencing revenue from the sale of services such as water, electricity, and sanitation. What this implies is that the infrastructure that provides these services needs to be maintained and upgraded before any money received from them is used to cover other expenditure.

A substantial allocation of R27.7 billion has been made towards metro trading services, but access to these funds will increasingly be dependent on compliance and performance, as with the infrastructure investments. Where municipalities fail to meet financial and operational standards, and continue to perform poorly, funding may be channelled through higher spheres of government, and municipalities may lose direct control of infrastructure grants.

The Risk of Reduced Grant Control

The potential for underperforming municipalities to lose direct control over specific infrastructure grants is a significant element of this reform. In such a case, infrastructure grant funding could be administered by national departments, provinces, or accredited entities, with the municipality no longer acting as the principal recipient of the funds, but rather being an implementation agent.

While this approach may strengthen oversight and ensure project completion, it reduces municipal autonomy over capital project planning and procurement, and capital infrastructure assets may be delivered through externally managed programs.

From a governance perspective, this reinforces the importance of compliance and financial discipline regarding the ring-fencing of revenue. From a financial perspective, it changes how municipalities plan, report, and account for infrastructure projects in their respective annual financial statements.

VAT Implications for Municipalities

The decision not to increase VAT provides predictability. This allows municipalities to forecast project costs more accurately and avoid mid-cycle budget revisions triggered by indirect tax increases.

However, in light of reform, and the implications thereof, VAT needs to be carefully accounted for in infrastructure grant-funded programs. Where municipalities directly procure infrastructure, VAT is levied onto project costing and future cash flow plans. However, if infrastructure grant funding shifts to another implementing authority, VAT invoices may no longer be issued in the respective municipality’s name, potentially affecting input VAT claims.

In addition, where a municipality acts as an implementing agent and charges an administration fee, that fee may constitute a taxable supply, attracting output VAT to be levied. While not overly complex, this alters the VAT profile of the municipality and requires careful structuring and compliance oversight.

Conclusion

For municipal finance, the 2026 budget represents a significant sea change. The government has achieved some fiscal stability by stabilizing debt, however, stability by itself will not address issues with service delivery.

A new era of accountability has been showcased by the National Treasury by tying infrastructure financing to performance targets and requiring that service revenue be put back into the services. The stakes are raised even further for municipalities by the potential to lose direct control over infrastructure grants.

Municipalities that adapt stand to benefit from substantial investment and restored public trust. However, those that fail to reform risk reduced control, reduced funding, altered VAT treatment of projects, and diminished operational control.

Ultimately, the success of the 2026 budget will not be measured in headline figures but rather in whether South Africa’s municipalities can translate reform and investment into reliable trading services, and infrastructure for the communities they serve.