ANN BERNSTEIN: Fiscal policy at a turning point, but trends will determine its longevity

The most important fiscal policy objective over the past 15 years has been the need to get the public finances on a more sustainable footing. The Centre for Development and Enterprise (CDE) has argued consistently that the best way to achieve fiscal stabilisation is the speedy implementation of the reforms needed to accelerate growth. It has taken far longer than it should have, and as we now know annual growth has declined year after year.

In the absence of growth, stabilising public debt can be achieved only by raising taxes or reducing spending. The government has pursued both strategies over the past decade with increasing, albeit imperfect, discipline. The core message of November’s medium-term budget policy statement was that those efforts may finally be bearing some fruit and debt levels may have reached an inflection point.

This is not an insignificant achievement: while we believe that more could have been done to accelerate growth and that the government could have, and should have, done more to slow expenditure growth over the past 15 years, it is good news that we have finally reached this point.

Deciding whether a particular fiscal policy is sustainable depends on how various trends play out, none of them certain and many of them subject to only limited government control.

Overly optimistic?

Will South Africa’s economy grow at 1.2% this year, 1.5% next year, 1.8% the year after and 2% in 2028 as the Treasury predicts? Maybe, maybe not. Will annual inflation average less than 3.5% over the next three years? Maybe, maybe not. Will the South African Revenue Service over- or underperform its revenue collection targets? Will the government’s ability to resist the temptation to spend money it doesn’t have weaken as local and then national elections loom ever closer, as in the past?

Over about the past decade the government has tended to be more optimistic about the likelihood of success of its stabilisation programme than has been warranted, and as a general proposition fiscal outcomes have tended to be worse than those presented in its budgets. Not hopelessly, fatally worse, but worse nevertheless.

Will this time be different? Maybe, maybe not. But more importantly, the Treasury is broadly right that, barring some important policy change, fiscal performance is far more sustainable now than it was. Kudos.

There are, however, some important “buts”. The most important of these is that the Treasury expects growth will continue to be slower than desirable and, critically, that it will be below the effective rate of interest paid on government debt.

The gap between these two numbers — the growth rate and the interest rate — is perhaps the single most important determinant of whether a country’s fiscal policies are likely to be sustainable. In our case, interest rates on government debt continue to exceed the economy’s growth rate, creating a huge risk. If debt levels are to stabilise, the government will have to find the money to repay its debt, which it can only do by increasing taxes or cutting expenditure.

That we are achieving this now is excellent news. It is exceptionally doubtful, though, that we can sustain this for very long. For that reason, and because we have limited control over the interest rate at which the government borrows, it remains imperative that the growth rate be raised.

Dark clouds

So how is that going? Well, the news is not all bad. But neither is it all good. Consider the Treasury’s delicate phrasing when talking about the reforms to energy and logistics networks: “Risks to the economic outlook are tilted to the downside. Further delays in implementing reforms, particularly in energy and logistics, would impede growth-enabling investment. Conversely, lower inflation and interest rates, and improvements in infrastructure spending, would support higher growth.”

This is not the language of a minister convinced that his colleagues in the rest of the cabinet are driving reform with much enthusiasm. Nor are the risks on the spending side entirely negligible. The three-year wage agreement struck by government and public servants in January contained an important, but underappreciated provision: that cost-of-living adjustments to public service salaries would be no higher than inflation next year and the year after.

This was considered a big win when the agreement was signed. However, there is a proviso: even if inflation is less than 4% salaries will increase by that amount. Well, it looks like that condition will be invoked, and salaries will rise faster than inflation, creating yet again the unhealthy dynamic of average salaries rising faster than the rest of the budget.

Then there is the question of the build-up of liabilities in the government system. For example, municipalities collectively owed Eskom nearly R95bn by March 31. This was almost R40bn more than just 12 months earlier. These trends are deeply problematic for Eskom and the municipalities, and because neither can be allowed to fail, the risk that further bailouts will be necessary must be rising. Transnet also needs to borrow huge amounts of money but is finding that it cannot do so unless the government guarantees its debt.

In recognition of all these and other spending pressures, when a final version of the 2025 budget was tabled in May, the minister of finance committed the government to conducting a series of spending reviews to identify wasteful and inefficient spending. The best that can be said about these is that they are very much a work in progress: only R7bn in possible savings has been pencilled in for the next two years, though the medium-term budget committed to further reviews.

This includes reviews of the sector education and training authorities (Setas) and industrial subsidies — areas in which we have repeatedly called for serious policy review. The ghost workers project is also ongoing, and voluntary retirement offers have just recently been made. It is far too soon to assess whether these will generate any long-term savings.

We take no pleasure in calling attention to the dark clouds hanging over the country’s finances when most of the commentary after the medium-term budget focused on its silver lining. Still, it is important to recognise that the cloud may have shrunk somewhat, but it is still there. Will it rain on our parade? Maybe, maybe not.

What we do know is that the executive chair of Yellowwoods, Adi Endhoven, one of the most active of organised business’s leadership group, was right to say in a speech several weeks ago that momentum for reform must not be allowed to dissipate; that we cannot become complacent; and that “the hardest part of the reform journey begins now, with the detailed, grinding work of sustained execution”.

• Bernstein is executive director of the Centre for Development & Enterprise.