It’s just three weeks to go to the medium-term budget, and one item on which an update will be expected is a new fiscal rule for SA.
In February, the National Treasury urged the government to consider adopting a binding fiscal rule that would commit it to ensuring SA stabilises and eventually reduces the public debt ratio. Investors have welcomed the idea and eagerly await the details.
The IMF has weighed in too, advising SA to adopt a rule, specifically a debt ceiling, to help it put debt on a sustained downward path. Nor is SA alone. The fund has lately been urging countries to focus on installing guardrails, including fiscal rules, to protect their public finances against political expediency and over-optimistic forecasts in an era in which global public debt levels are soaring and borrowing costs are no longer low.
But the experience of the UK’s new government, which like SA’s will table a budget on October 30, should give pause. There, the new Labour government’s election manifesto commitment to stick with the fiscal rules of its Tory predecessor is proving to be a straitjacket for chancellor Rachel Reeves. She wants to invest hugely in infrastructure to lift the UK’s anaemic growth rate and improve services, but she can’t raise borrowing to do so because of a fiscal rule that commits the government to reducing the public debt ratio by the fifth year of its economic forecast horizon.
The solution that’s being proposed is simply to tweak the rule to redefine “debt”. This would release billions of pounds for investment, with a definition of debt that refers to the government’s broader balance sheet not just explicit sovereign debt. Investors seem surprisingly supportive, even though one would have expected that the whole idea of a fiscal rule is it should be consistent and credible.
This touches on one question about fiscal rules: do they exist just to be broken (or at least tweaked)? More than 100 countries have adopted fiscal rules in recent decades, but the global public debt ratio keeps rising. That touches on another question, or paradox, which is that fiscal rules can only really be effective in ensuring sustainable public finances if there is broad political and social consensus for the tough choices that are required. But if there were such a broad consensus, why would you need a rule?
So a first question is why might SA need a fiscal rule, or rather a new fiscal rule. We had an old one: the expenditure ceiling put in place in 2012. But the Treasury argued in February’s budget documents that existing strategies for fiscal consolidation put in place from 2012/13 failed to stabilise the public debt — hence the need to consider a stronger fiscal anchor that would commit the government more reliably and credibly.
That would presumably give the Treasury greater power than it now has to say no and to stand up to any pressure to deviate from the path towards sustainable public finances. It could in theory also bind future, more populist, governments or treasuries, even if in practice it’s hard to see how legislation could do this.
The hope is that a legislated rule would give the government’s budget projections more credibility with investors and hold the government publicly accountable for achieving them. That would help lower borrowing costs for the government and across the economy, and ideally help to cut the public debt and boost economic growth, creating a virtuous cycle that would itself help bring down the public debt ratio further over time.
But that assumes investors would indeed give SA credit for its commitment. As it is, they are still sceptical about SA’s ability to stay on the path to stabilising the public debt, even though the Treasury’s projections now see it peaking at 75% of GDP in the next fiscal year (2025/26).
A fiscal rule on which the government can’t deliver any time soon — such as the 60%-65% debt ceiling some have suggested — could be even worse for credibility. So too would a rule that clearly doesn’t have the support of key fiscal stakeholders such as trade unions or political leaders. Conversely, Wits University professor and former budget office head Michael Sachs argues that if all parties in the government of national unity were to stand up and agree to achieving a set of fiscal targets over the next five years, that would be a powerful statement of intent that would be more effective than a piece of legislation on the debt path.
The worst outcome would be if SA received no credit, and no tangible benefit in terms of borrowing costs, for putting a rule in place — but imposed on itself all the risks of doing so. A badly framed rule can generate all sorts of perverse incentives, causing the government to make bad choices or hide things under the proverbial carpet just to comply.
The rule doesn’t have to be a debt ceiling. Indeed, the problem with targeting the public debt ratio is that it is a projection, which depends on projecting variables such as economic growth and interest and exchange rates over which the Treasury has little control. Nor is debt itself a simple concept, as the UK case suggests. The IMF and ratings agencies already define SA’s public debt differently from the Treasury, for example. There are questions such as whether to put Eskom bailouts below or above the line and whether to include guarantees, as well as whether it isn’t more appropriate to target the broader public sector balance sheet, including assets not just liabilities.
Options other than a debt rule are possible, such as spending or revenue targets — or procedural rather than hard numerical rules. All options are on the table. However, the Treasury is most likely to prefer a softer rule that commits the government to restoring fiscal sustainability, rather than to any hard numerical targets. That’s already supposedly the position anyway. The argument might be that committing the government as a whole to this as a fiscal goal, rather than leaving it to the Treasury, would give it far more clout.
The Treasury has promised wide consultation. It will likely issue a discussion document in February, if not necessarily this month. A wide discussion process would be important in itself. It could become heated though. The Treasury will almost certainly be accused of trying to prevent democratic debate on economic policy by trying to legislate a rule, even a softish one.
Whether finance minister Enoch Godongwana will have the political appetite to put one to parliament at some point is a question, as is whether the new parliament would be receptive. He will have to make a call on the politics and the markets, and balance the risks.
• Joffe is editor-at-large.
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