Regarding the credibility of public financial management, the brutality of credit markets forces even the most hardened hand to yield — as Donald Trump recently discovered.
Managing public finances remains one of the most challenging political deployments in most societies. Balancing an ever-increasing set of demands through various economic cycles requires political horse-trading that leaves everyone accepting some concessions and the occasional tough medicine when their demands are not fully funded.
The primary sources of any finance minister’s kitty — taxes and borrowings — are subject to varying complexities and managing them all properly is the litmus test of a finance minister’s temperance. The key distinction between taxes and borrowings relates to the ability to leverage a political mandate to charge the taxes that are necessary to sustain the purse, and maintain enough credibility to extract acceptable lending terms. The legitimacy of the tax system lies in whether citizens believe this is functional and fair.
The difficulty with a credibility crisis is that those who provide funds to countries have a notorious habit of voting with their sentiment.
Creating and maintaining this trust is a mission the SA Revenue Service has been working on, which was especially critical in the aftermath of the Tom Moyane years. Under Edward Kieswetter the credibility of the agency has improved, but in the aftermath of the latest proposed increase in taxes a renewed focus on efficiencies was unavoidable.
Kieswetter’s statement that more could be collected if more resources were allocated to the task helps get public support for the agency. Since no-one wants to pay more tax, getting the best out of what exists is a national imperative. All of this would be much easier if the underlying economic activity that underpins all taxes was growing at a sufficient rate.
In the absence of growth — the Reserve Bank and the National Treasury project lean numbers for the foreseeable future, even if the US tariff war subsides — the balancing act between borrowings and taxes will eventually reach the end of its runway, with spending cuts becoming inevitable.
On the borrowing side finance minister Enoch Godongwana’s challenges are a bit more complicated. Since the country cannot fund all its programmes through taxes, the ability to borrow remains an important arrow in the minister’s quiver. But in these markets one’s currency is one’s word. In the borrowing conversation repayment looms large. When the minister’s ability to generate taxes in line with new spending commitments is regarded as less than assured, the risk associated with borrowing escalates.
The difficulty with a credibility crisis is that those who provide funds to countries have a notorious habit of voting with their sentiment. When Liz Truss and Kwasi Kwarteng unleashed an unfunded budget on the British public the reaction by the market was swift and brutal enough for the chancellor to be sacked, followed by the prime minister herself.
Trump, whose world is dominated by the prism of his convictions, has stated that it was the projected surge in borrowing costs for American bonds that persuaded him to implement a 90-day pause on his draconian tariff regime.
As Godongwana waits to see if his national budget will ultimately see the light of day, managing the credibility of the Treasury is at stake. If a third version of the budget has to be drafted without the tax model the minister insists is necessary to balance the books, more difficult conversations loom on the borrowing horizon — with serious consequences for the country.
On the political front, whether a minister who is forced into a third draft can retain his position beyond the impasse will be the next critical question.
• Sithole is an accountant, academic and activist.
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