Wisdom of lowering inflation target questioned in parliament

Civil society organisations and economists criticised the Treasury’s decision to endorse a 3% inflation target for the Reserve Bank (Sarb) to implement in parliament on Wednesday.

They also rejected the Treasury’s debt stabilisation and fiscal consolidation stance, which they argued amounted to the continuation of austerity, which negatively affected service delivery and which they had repeatedly rejected for years.

Economists from Wits University’s Public Economy Project (PEP), the Budget Justice Coalition (BJC), the Alternative Information and Development Centre (AIDC) and the Institute for Economic Justice (IEJ) told MPs the lower inflation target would hit government revenue and harm indebted households.

Finance minister Enoch Godongwana, on the other hand, has motivated for a lower inflation target on the grounds that it will reduce the cost of living and borrowing costs, thereby supporting long-term economic growth and job creation. The Treasury has acknowledged that the lower target will have short-term effects on fiscal metrics by lowering nominal GDP, reducing revenue and producing a less favourable debt-to-GDP ratio, but believes the long-term gains outweigh the short-term drawbacks.

Read: Consumer inflation at more than one-year high

PEP economist Rashaad Amra said during public hearings by parliament’s two finance committees on the medium-term budget policy statement (MTBPS), “Monetary policy has effectively become the dominant driver of fiscal outcomes, with the Treasury adjusting the fiscal framework to align to the Sarb’s disinflationary stance.

“Lower inflation has sharply reduced nominal GDP, which in turn weakens revenue, worsens debt ratios and forces deeper expenditure compression — even as real economic activity remains broadly unchanged,“ Amra said.

“Monetary policy, not fiscal behaviour, is responsible for the deterioration in the fiscal outlook. The 2025 MTBPS reflects a monetary-led consolidation path that compresses the fiscal space primarily through nominal mechanisms rather than structural reform or a developmental strategy. Monetary policy does not clearly adjust to fiscal realities, employment pressures or long-term development needs.”

Monetary policy, not fiscal behaviour, is responsible for the deterioration in the fiscal outlook ... Monetary policy does not clearly adjust to fiscal realities, employment pressures or long-term development needs.
— Rashaad Amra, PEP economist

Amra said the Treasury should be called by parliament to report on the co-ordination between monetary and fiscal policy during the year.

Lower GDP inflation depressed nominal revenue collections, weakened the ability to service debt and contributed to the deterioration in debt-to-GDP.

“Parliament must interrogate who bears the short- and medium-term costs of the lower inflation target and whether the policy stance advances or undermines socioeconomic rights and long-term developmental priorities for the state,” Amra cautioned.

He noted that bondholders and financial institutions benefited from lower inflation, while households with high debt burdens suffered from slower nominal wage growth, which reduced both disposable income and domestic VAT revenue.

Amra pointed out that government expenditure had to bear a disproportionate burden for consolidation, raising concerns for service delivery and equity. Non-interest expenditure as a share of GDP is projected by Treasury to fall from 25.1% in 2022 to 23.3% by 2028, a contraction that he said was not driven by efficiency gains but by prolonged consolidation and reductions in standards of service delivery.

A lower target will enforce higher interest rates for longer, constrain revenue and nominal GDP, increase the cost of government borrowing and suppress jobs and investment.
— Budget Justice Coalition

Amra said the Treasury’s commitment to achieving primary budget surpluses — when revenue exceeds non-interest expenditure — implied sustained real declines in per-capita allocations to essential services. Real per-capita allocations for health, education and policing continued to decline, compounding the attrition in provincial budgets and frontline services over the past decade.

He questioned the credibility of the MTBPS, which assumed zero real growth in final government consumption in 2027, which he believed was an implausible scenario given existing contracts, wage commitments and cost pressures that did not track CPI.

Blunt tool

Researcher from independent think tank the IEJ Liso Mdutyana noted that inflation in SA had largely been driven by global shocks (for example, the price of oil) and administered prices (on electricity, water and fuel), not rising domestic demand. The repo rate, he said, was a blunt tool that strangled domestic demand and was costly for many households due to its effect on the cost of credit.

Read: A businesses brace for trade dip despite lower inflation target, Sacci survey shows

The AIDC noted that the MTBPS projected a real decline in non-interest main expenditure by an average of 0,4% over the medium term, with negative effects on service delivery.

The BJC argued the lowering the inflation target to 3% was proposed without transparent evidence or socioeconomic impact assessments. It said that cost-of-living increases were driven by global and administered prices, not domestic demand.

“A lower target will enforce higher interest rates for longer, constrain revenue and nominal GDP, increase the cost of government borrowing and suppress jobs and investment,” the coalition said.

Cosatu parliamentary co-ordinator Matthew Parks called for a review of the Sarb’s mandate to ensure an appropriate balance between protecting the rand and keeping inflation low on the one hand, and stimulating economic growth and job creation and easing the debt burden upon workers through a lower repo rate on the other.