SA is teetering on a precipice. Years of fiscal drift, deepened by sluggish economic growth, soaring unemployment and rising debt-service costs have pushed us into an unsustainable trajectory.
For evidence, take a cursory glance at last week’s Budget Review. The budget shortfall would amount to about R600bn, or 5% of GDP. Gross public debt, a widely watched measure of a country’s financial health by ratings agencies and investors in government bonds, will peak at about R6-trillion, or 76% of GDP. That ratio was under 25% in 2009.
The result? About R400bn of our R2-trillion revenue is now swallowed by interest payments on our gigantic debt burden, R4-trillion of which was amassed over the past decade, ostensibly to lift our economy out of the financial crisis-induced downturn. Instead, much of it was squandered through corruption, or simply wasted on ill-conceived projects and inefficiencies.
The Treasury is now proposing the introduction of a fiscal anchor — an implicit acknowledgment that the Public Finance Management Act, the backbone of SA’s fiscal management architecture, can only go so far in addressing the country’s escalating fiscal challenges.
In a discussion document issued alongside the budget last week, the Treasury spotted a gap in the act — its focus on compliance without binding benchmarks. To address this the proposal suggests introducing explicit and binding benchmarks such as a debt ceiling or fiscal sustainability principles, which go beyond the act’s procedural focus.
As outlined in the front-page article in today’s edition of Business Day, the Treasury’s proposals represent one of the boldest postapartheid attempts to impose discipline on SA’s public finances, echoing Thabo Mbeki’s 1996 Growth, Employment & Redistribution (Gear) strategy, though narrower in focus.
Here’s a thought: combine the precision of hard numbers with the wiggle room of broad principles. It is the most pragmatic response to SA fiscal challenges, at least from where this writer stands. A debt ceiling — say pegged at 60%-65% of GDP — would send a “don’t worry, we’ve got this” signal to ratings agencies and investors, whose sky-high interest demands on SA debt for our fiscal ill-discipline are felt far beyond the Treasury at the heart of the SA economy.
Every rand spent servicing debt at these punishing interest rates is a rand not going toward schools, hospitals, infrastructure or creating jobs. It’s a ripple effect that stretches into households struggling with few services, businesses grappling with higher costs, and the economy choking on its lack of growth. It’s not finance minister Enoch Godongwana’s problem — it’s everyone’s problem. A ceiling of some sort would go a long way in reassuring the markets, potentially easing up on punishing interest rates demands.
On the other hand, principle-based rules offer the nuance necessary to address SA’s economic complexities. Embedding fiscal sustainability principles into parliamentary processes ensures we don’t hamstring the government when the next crisis or opportunity rolls around, or we decide to balance the needs of today with the responsibility to leave a sustainable financial legacy for those who come after us.
It’s a smart balancing act. Hard rules keep us honest, softer ones keep us sane. But here’s the thing: SA has a terrible track record of sticking to plans. The act, the medium-term expenditure framework, even the past expenditure ceilings, all sounded great when announced. So before we start calling the Treasury’s step towards fiscal reform proposals the saviour of our economy, let’s remember that a policy is only as good as its implementation — and this is a government that struggles to make money from power and transport monopolies.
Still, why stop at tweaking rules when we could throw the old playbook out altogether? Around the world fiscal nerds are whispering about “net worth anchors”. Instead of obsessing over debt levels, this approach looks at the bigger picture — government’s assets versus its liabilities. Think of it like managing your household finances — if you take out a loan to buy a house, it’s not just a debt it’s also an asset that will in all likelihood grow in value.
For SA this could be revolutionary. Instead of slashing spending to stay within arbitrary limits, a net worth framework would incentivise smart investments. Borrowing to build a power grid or expand public transit might still bump up debt, but the long-term benefits would outweigh the cost.
That said, focusing on net worth is a luxury that assumes fiscal discipline is already in place. It’s overly experimental in a high-risk environment. Even so, there’s merit in the argument that net worth anchors are better suited once the foundation for fiscal sustainability has been laid. The debt burden and credibility crisis demand simpler, more enforceable solutions. For now it’s about laying the groundwork; the vision can follow.
For all its flaws a hybrid fiscal anchor is probably the most pragmatic path forward in the short term. It strikes a deft balance between sending a signal of the seriousness to the markets and avoiding the kind of inflexible rules that could backfire during an economic shock or even an opportunity. The success of this reform depends entirely on execution.
The time for well-meaning gestures is over. Mmusi Maimane, chair of the parliamentary committee that oversees how departments and entities spend their appropriated funds, aptly illustrates the razor-thin margin for error: “We are no longer making choices that are good or bad, we are making choices that are worse or much worse and that’s where we are at.”
• Motsoeneng is Business Day’s acting editor.
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