The unsurprising negative GDP growth figures for the second quarter of 2026 are another strong reminder that we must begin thinking about the 2026 medium-term budget on October 21. The medium-term budget policy statement will be reframed against a markedly more difficult and different economic backdrop than that assumed in the February budget. At the start of the year the outlook was relatively favourable: inflation was close to the Reserve Bank’s new 3% target, interest rates had eased, the national budget offered some tax relief, consumer spending was improving and business confidence was recovering.However, the global energy crisis interrupted this economic momentum in the second quarter. Global headwinds raised petrol and diesel costs, which filtered into transport and production expenses and squeezed real disposable incomes. Headline inflation accelerated sharply during the first half of the year, rising from 3.1% in March to 5% in June, before easing to 4.3% in July. Though the more recent headline inflation figures have been encouraging, the “higher-for-longer” interest rate outlook seems likely to prevail for now. With inflation still above target, energy markets remaining unsettled, inflation rising and interest rates higher abroad, the Bank’s monetary policy committee (MPC) faces another tough decision at its meeting on September 23.The February budget projected real GDP growth of 1.6% in 2026, rising to 1.8% in 2027 and 2% in 2028. But now those forecasts now look too optimistic. (Debbie van heerden ) The growth outlook has simultaneously weakened. The February budget projected real GDP growth of 1.6% in 2026, rising to 1.8% in 2027 and 2% in 2028. Those forecasts now look too optimistic. The economy expanded by 0.4% in the first quarter, but the composition of growth was not especially strong. Unemployment rose in the second quarter to 33.6%. The Bank subsequently lowered its 2026 growth projection, while other institutions have been even more cautious. Against the background of the growth setback in the second quarter, a plausible forecast for GDP growth in 2026 is about 1.2%.Fixed investment remains a key concern. The February budget expected gross fixed capital formation to recover by 2.4% in 2026 after contracting in 2025. Instead, investment has weakened again in recent months. Nedbank’s recent survey of listed capital projects in the first half of 2026 showed a drop of 81% in fixed investment. Private sector investment remains constrained by weak business confidence, high financing costs, policy uncertainty and subdued domestic demand. Recent business surveys highlight that greater clarity in local governance and infrastructural delivery after the municipal elections could support confidence, while heightened reform uncertainty could further delay investment decisions.Nedbank’s recent survey of listed capital projects in the first half of 2026 showed a drop of 81% in fixed investment. On the positive side, progress in public infrastructure spending and irreversible reforms in electricity, logistics and renewable energy are nonetheless expected to modestly improve the investment outlook in the medium term. But for now 2026 is increasingly looking like another transition year, rather than a decisive investment recovery. The Achilles heel of weak investment is reflected in the fixed investment-to-GDP ratio, which remains only about 14%, whereas it should be closer to 20%. Without far stronger investment the economy will struggle to break out of its narrow 1%-2% growth corridor. That, in turn, limits the future tax base.This fiscal vulnerability underscores the importance of accelerating the recently announced intensified phase 3 of government-business partnerships, particularly in the infrastructure, mining, agriculture and tourism spheres. Even if growth-friendly reforms are incomplete, they are increasingly pointing in the right direction. With the collective ambitious targets now at 3% GDP growth and a million extra jobs by 2030, a visible step change in reform implementation with hard targets is needed if the private sector is to do most of the heavy lifting in investment.The February budget rested on a relatively favourable fiscal trajectory. The Treasury projected consolidated revenue of about R2.35-trillion in 2026/27 and expenditure of about R2.67-trillion. The consolidated budget deficit was expected to narrow from 4.5% of GDP in 2025/26 to 4% in 2026/27, while gross government debt was projected to begin declining after peaking near 79% of GDP. However, debt service costs remain extremely high at about 22% of the total budget, absorbing too large a share of revenue that could otherwise fund infrastructure and public services.So far, the fiscal outcome appears better than the broad economic backdrop may suggest. Revenue collections in the first three months of 2026/27 rose strongly compared with the same period last year, supported by personal income tax, VAT and corporate income tax. Expenditure growth has been more contained and the main budget recorded a small cumulative surplus at end-June. These early figures provide some reassurance, but they should not be read in isolation as tax collections and government spending are highly seasonal.The Treasury therefore still faces the following challenges in preparing the 2026 medium-term budget:Deciding to what extent to revise down the February growth assumption. A credible fiscal framework should reflect realistic economic conditions rather than rely on over-optimistic economic forecasts. The Treasury commitment must strengthen a resumed economic recovery that now starts from a weaker base. The medium-term budget must navigate expenditure pressures from infrastructure, social protection, health, education and financially distressed municipalities. The emphasis must be on cutting fat, not muscle. The Treasury must protect its debt-stabilisation strategy in an environment of high borrowing costs.We know that all fiscal roads ultimately lead through far higher inclusive economic growth. Renewed growth must be driven mainly by domestic factors over which the economy indeed has control. The central question for the 2026 medium-term budget is whether the Treasury can preserve fiscal credibility while accommodating the reality that the economy is growing more tardily than previously envisaged. The answer is still probably “yes” because revenue performance still appears resilient and expenditure remains broadly contained.However, the 1.6% growth assumption for 2026 and the modified growth outlook have clearly become the vulnerable links in the fiscal framework. The economy is growing far too slowly and stable foundations are not enough. The urgent challenge is therefore not just fiscal consolidation but whether the medium-term budget commitment will boldly back Reserve Bank governor Lesetja Kganyago’s recent strong call for policy to take uncomfortable structural risks to lift the economic growth rate. While fiscal discipline remains essential, “a halo”, as the saying goes, “only has to fall a few centimetres to become a noose”.• Parsons is a professor at the North-West University Business School and an extraordinary professor at the University of the Western Cape. Krugell is a professor at the North-West University School of Economics.Business Day