A fiscal anchor would not be a panacea that would ensure more sustainable public finances for SA, but countries with fiscal anchors have somewhat better outcomes than countries that do not, the Treasury says in a fiscal anchor discussion document.
The document, published with last week’s budget, warns of risks to SA’s growth outlook and its ability to deliver essential social services posed by its high public debt level, which climbed from 24% of the size of the economy in 2009 to 74% in 2024 and is now set to peak at 76.2% this year, with debt costs consuming more than a fifth of tax revenue.
The document makes the case that a well-designed, legislated fiscal anchor could “enhance fiscal credibility, strengthen budget discipline and foster investor confidence, ultimately supporting economic growth and stability”.
The Treasury had proposed at the time of the 2024 budget that the government consider a binding anchor and promised in October to table a document for discussion — as it has now done, proposing two possible options for an anchor. One would impose a numerical debt and/or deficit ceiling; the other would require each administration to commit to a sustainable five-year fiscal plan that would be monitored by parliament.
The document weighs up the pros and cons, pointing to the need to balance discipline with flexibility. Many European countries have numerical rules, with the US, Germany and Armenia setting hard limits on debt. Australia and New Zealand standards promote fiscal responsibility without rigid constraints.
The Treasury document said decisions on an anchor would have to be taken carefully and legislative amendments would be necessary, but “an important function of a fiscal anchor is that it is a potentially important driver of social and political engagement with the issue of sustainability and its importance”.
Minister in the presidency Maropene Ramokgopa said on February 10 that the cabinet had ruled out adopting a fiscal anchor that would put a binding constraint on fiscal policy, declining to include it in its blueprint for growth out to 2029 on concerns that it would constrain the Treasury’s ability to execute some of its responsibilities.
But the document makes it clear that while a fiscal rule should be designed so it didn’t prevent policymakers from stimulating the economy in the face of a downturn, the purpose of such a rule was to constrain them: “a fiscal rule is supposed to make it harder to adopt policies that may have unclear or short-term benefits, but which create costs for future administrations and generations”.
It said SA’s experience showed fiscal sustainability was compatible with rapid progress on socioeconomic reforms — the report pointed out that between the late 1990s and 2000s the government slashed its debt ratio and debt service costs but doubled public spending in real terms, funding a large expansion of social and capital budgets. “The period was also associated with dramatic improvements in socioeconomic indicators.”
Treasury officials told parliament last week that the fiscal anchor was intended as a longer-term measure to ensure sustainable public finances: in the short to medium term, fiscal policy has since February 2024 been anchored on generating primary fiscal surpluses (which means revenue exceeds noninterest spending) large enough to reduce the debt ratio to 70% by the end of the decade.
“Achieving this would bring debt to a level consistent with an investment grade credit rating, which would in turn help to contribute to faster economic growth,” the document said.
The government achieved a primary surplus, of 0.5% of GDP, in fiscal 2023/24 for the first time since before the 2008/09 global financial crisis, and last week’s budget projected another 0.5% primary surplus for the 2024/25 fiscal year, rising to 2% in 2027/28. That enables the debt to stabilise at 76.2% of GDP in 2025/26 before starting to come down.
Ratings agency Fitch said the budget suggested debt stabilisation would remain difficult. “We remain less optimistic that general government debt is stabilising, with Fitch’s baseline indicating that debt/ GDP will continue to rise in the next two years”.
The IMF, which has urged SA to adopt a fiscal rule anchored in a 60% debt ceiling, has also expressed scepticism about the government’s ability to stabilise the debt ratio, which it sees rising more than 80%.
The IMF is due to update forecasts at its April meetings.
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