When Finance Minister Enoch Godongwana delivers the budget this afternoon, we are likely to hear mostly bad news. Slower than expected economic growth will mean tax revenue will be lower than expected, and debt as a share of GDP, higher.
The Treasury said last year that it expects debt as a share of GDP to peak next fiscal year at 77.7 percent. With lower growth and higher-than-expected spending on state enterprise bailouts, civil service pay and grants, that ratio is likely to be far surpassed. The Bureau for Economic Research expects debt to peak at 83 percent of GDP in the financial year after next. Debt service was the largest spending item in last year’s budget and is likely to remain so in the budget released this afternoon.
Faster-growing countries with rising tax revenue are in a far better position to service their debt than we are. We suffer from low growth, and that means tax revenue is under pressure. That makes our debt a greater burden than it is for faster-growing countries, and this raises the risk of default.
The ANC’s ambitions remain large, and as the party’s support erodes, it might become increasingly populist and go for more freebies. A National Health Insurance scheme has been delayed for the time being, but is still on the cards. And as long as state enterprises are not privatised, it is almost certain that they will rack up ever larger losses.
Will the ANC ever be able to better control spending and reduce public debt?
Could South Africa adopt fiscal rules: laws that prevent the government from going into the danger zone of overspending and over-borrowing, but which can have escape clauses?
Last year, the Finance Minister spoke about introducing a “fiscal anchor” as a means to ensure sustainable public finances. With pressure on the currency and bonds, slow growth and rising debt, the Finance Minister might want to calm investors and come up with details on the anchor this afternoon.
Long-lasting restrictions
The aim of a fiscal anchor, as with fiscal rules, is to introduce credibility into plans on public finances. Fiscal rules are a way of setting long-lasting restrictions on the budgetary process on one or more parameters, such as debt to GDP, spending, and the deficit. These rules are often combined with the setting up of an independent authority, a fiscal council, that has the job of warning about the direction of travel and ringing the alarm bell on a breach of the rules.
Now that over 100 countries have such rules, and about 50 have councils to monitor their implementation, it is almost best practice to have such arrangements in place.
If they are not easily violated, the adoption of fiscal rules can build a government’s credibility. These allow the politicians to point to a rule and say no to populist pressures, the unions or special interests.
But when a crisis hits, a lot can change. The Covid-19 pandemic was a massive test of fiscal rules. It led to the activation of escape clauses to temporarily suspend rules, so that governments could support their economies. Countries without escape clauses had to suspend or change the rules or introduce new ones.
As members of the single-currency Euro area, the crisis hit countries in the 2007 to 2008 Great Recession. Portugal, Ireland, Greece, and Spain were meant to have adhered to the fiscal rules in the Maastricht Treaty. These limited budget deficits to three percent of GDP and a public debt of 60 percent of GDP. These rules were broken well before these countries went into a crisis, raising the issue of how countries actually enforce the rules.
With the widespread international adoption of fiscal rules, South Africa is also under pressure to adopt a version of these rules. That is why the Treasury might want to introduce a “fiscal anchor”. But three years ago, the National Treasury argued that in our case, persistently lower-than-projected growth and tax revenue, as well as exchange rate movements could see wide variations in the debt to GDP ratio. It also pointed out that one of the disadvantages of fiscal rules is that they can be pro-cyclical and limit a state’s flexibility in dealing with recessions.
Stabilise the national debt
The Democratic Alliance finance spokesperson, Dion George, is pushing for his party’s Responsible Spending Bill, introduced last year, to be passed before the election. The aim of the proposed legislation is to stabilise the national debt and show a commitment to cautious fiscal policy.
The Responsible Spending Bill would, if passed, prescribe that for the four financial years from the passage of the Act, net public debt as a share of GDP would not exceed the previous year’s level. Every four years there would be a review of the fiscal rule that would allow its amendment, renewal, or termination. For specific years the National Assembly could grant exemptions to the fiscal rule if the Finance Minister were to give valid reasons. That would cap the debt to GDP ratio, but the flexibility would still mean that each time exemptions were granted, alarm bells would ring.
If the fiscal council were not demonstrably independent of the government, its accounting might be suspect.
Only in the case of a global shock might it be more acceptable to pull the escape lever, as we would not be alone.
If a country cannot ensure that it can stick to the rules, there is little incentive for it to have them. When a government whose power rests on patronage and spending has an economy which suffers from structural low growth and high unemployment, it will not be able to stick to the rules. Those who least need the rules are more likely to adopt them.
As the Treasury noted in its remarks on a proposal for fiscal rules three years ago, “It is difficult to implement far-reaching fiscal rules because South Africa’s economic growth is persistently weak.” That means revenue shortfalls and a structural deficit.
What is needed, said the Treasury, is “significant implementation of economic reforms,” otherwise the country will continue to be stuck in a low growth cycle, with fiscal challenges and a rising debt burden. Introducing fiscal rules would mean an alarm bell rings every year. That could be useful to put the government on notice, but it would not help solve the country’s overriding problem of how to bring about reform to generate far faster growth.
[Image: https://www.flickr.com/photos/governmentza/51899826130]
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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