A fiscal rule could improve the sustainability and credibility of SA’s public finances and provide positive signals, but such rules are not a silver bullet, and sufficient political buy-in and an appropriate design would be required for it to succeed, says the Bureau for Economic Research (BER).
In a new report, released a month before finance minister Enoch Godongwana tables the budget on February 19, the Stellenbosch-based BER supports the new fiscal rule that the Treasury proposed at last February’s budget. But it recommends a sequence of steps and operational rules to get SA to the point at which it stabilises the public debt and can introduce a suitable, legislated debt anchor.
More than 105 countries have adopted at least one fiscal rule, binding their governments to debt ceilings or spending and revenue rules that try to ensure sound management of the public finances and a sustainable level of public debt, whether in good times or bad. SA’s public debt ratio, and its debt servicing costs, have jumped dramatically since 2008/09, despite constant promises by the government to stabilise the debt and despite an expenditure ceiling that the Treasury put in place in 2012 in an effort to achieve this.
The Treasury said in the February 2024 budget that the state would propose a new “binding fiscal anchor” to chart a sustainable long-term path for the public finances. The idea was widely welcomed in the market as one that could cement the government’s ability to deliver on its fiscal targets despite politically driven spending pressure.
But it is now clear the process will take time. The Treasury said in October’s medium-term budget it would release a discussion paper on this before the end of the fiscal year in March, possibly even at the time of next month’s budget.
Treasury director-general Duncan Pieterse told Business Day late last year that a fiscal anchor might be important for the long term, but in the short term the Treasury still needed to convince the market it could deliver on its promise to stabilise the public debt level next year and to restore the fiscal credibility it lost in the years when it kept missing its targets.
The IMF in its recent report on SA recommended a fiscal rule anchored in a debt ceiling of about 60% in line with peers, but said such a rule should build on the Treasury’s existing expenditure ceiling.
SA now spends more on paying the interest on its public debt than it does on public healthcare, basic education or social protection. The Treasury projected in October that the public debt would stabilise in 2025/26, at 75.5% of GDP. But some economists, including those of the BER and IMF, remain sceptical and next month’s updated budget numbers will be closely scrutinised.
On Monday the Treasury entered its close-out period, in which it declines all investor meetings or media interviews in the run-up to budget day.
The study by the BER’s Impumelelo growth initiative, which is led by former senior Treasury official Roy Havemann, concluded that credible numerical fiscal rules could, at least partially, assist SA in addressing its fiscal challenges. But it warned fiscal credibility could be even further eroded if SA reneged on it soon after its adoption, or if the rules were poorly designed.
Effective tools
In the correct setting, fiscal rules could be effective signalling tools for the market, bolstering fiscal policy continuity and enhancing credibility, the BER said.
But empirically, the track record of fiscal rules is mixed “and they do not work in isolation from the wider institutional context. As such, a supportive institutional framework and political buy-in is essential,” it said.
The BER study recommends that debt stabilisation should be the initial ultimate objective. “The best measure of fiscal sustainability is always the path of debt — inexorably rising debt is an obvious harbinger of impending fiscal collapse, while stable and declining debt is associated with fiscal prudence,” it said.
It proposes an operational rule to guide the budget process that sets a spending envelope, guided by an upfront rule that targets government consumption spending as a share of GDP.
“Once debt has definitively stabilised, the next phase would be to reduce debt and to introduce a suitable debt anchor. This should be achieved by targeting a debt-reducing primary balance as the intermediate objective and operationalised through a government expenditure rule,” the report said.
It said an independent watchdog and fiscal transparency would help to ensure credibility and anchor market expectations. It also said fiscal consolidation should be balanced with economic growth, recommending the design of the rule should take care not to affect growth-focused spending in areas such as infrastructure or education. The rule must be binding and difficult to break, it said.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.