The national budget has turned into a grab-bag of promises and optimistic timeline forecasts. Few of them are matched by reality, and most get adjusted and quietly brushed aside before the ink has even dried.
The 2025 Budget is approaching. Now is a good time to take stock of the promises of the 2024 Budget and the state of the country’s finances. It is hardly contested that South Africa’s debt has firmly crossed the line and is fiscally unsustainable. What has not yet become so well-known is that there is no clear stabilising force.
One such a stabilising force would be a fiscal anchor. The 2024 Budget committed to a “binding fiscal anchor for future sustainability” after “extensive consultation” with the interim adoption of a debt-stabilising primary surplus. The Mid-Term Budget statement further indicated that a discussion document on a long-term fiscal anchor would be released by end-March 2025. While the National Treasury has managed to slow the pace of debt accumulation over the past year, it has not been able to prevent it entirely. This, together with the string of anti-investment policies recently brought to the forefront, makes it imperative for Treasury to act with urgency and to implement a definite fiscal anchor.
Why the focus on debt?
It is easy to tune out once you’ve heard the 75% debt-to-GDP [Gross Domestic Product] ratio figure a hundred times, but it is worth taking a step back to establish a clear understanding of why this figure is so significant and continues to draw so much attention. It starts by establishing why economic growth is the ultimate goal.
Growth is what drives job creation and improves living conditions. Since 2008, South Africa’s growth rate has averaged 1.3% annually. As John Endres, CEO of the Institute of Race Relations (IRR), pointed out in the first IRR Blueprint for Growth paper, Arming SA’s pro-growth forces, available on the IRR website, at the current pace it would take 54 years for the country to double its prosperity. At the individual level, this effectively means that many working individuals today would retire or even pass away before seeing any meaningful improvement in their living standards.
If South Africa achieved a growth rate of 7%, as proposed by the IRR, prosperity would double in just 10 years. That’s the difference between seeing real economic benefits during your prime working years versus waiting a lifetime.
With this in mind, we must then ask: how does debt influence the country’s ability to achieve substantial growth?
High public debt has attracted a lot of negative publicity over the past decade. However, it can support growth when it is manageable, meaning the cost of borrowing (interest rates) is lower than the economic growth rate. In this scenario, government can sustain public expenditure over the long term; it can meet its debt obligations and continue funding public expenditure. In this scenario, government is fiscally sustainable.
However, when interest rates on government debt are higher than the rate of return of the economy, the government struggles to keep up with repayments. This ultimately creates a cycle where rising debt-service costs slow economic growth, and slower growth makes it harder to reduce debt.
Since 2008, average debt-service costs have been 3.1% of GDP. The average cost of servicing total debt exceeds the average nominal growth rate (1.3%), and the country is not running a sufficient budget balance to offset the difference. This means that the budget is fiscally unsustainable.
The debt-to-GDP ratio is evidently important. The next step is determining what can be done to get to a fiscally sustainable position that will allow the economy to grow. All eyes turn to Treasury, which is tasked with ensuring fiscal sustainability.
Broadly speaking, Treasury has two options. The first is to recommit to stabilising debt by reducing expenditure and tightening fiscal discipline. The second is to throw anchor.
Option 1: More commitments
It is important to emphasise that Treasury’s credibility as an institution is not in question. However, its ability to deliver on repeated promises for fiscal consolidation is.
In a recent report, A fiscal anchor for South Africa, The Bureau for Economic Research notes that since 2010/11, Treasury has made 13 separate commitments to stabilise debt at various levels, each accompanied by lofty promises of fiscal discipline. Despite these assurances, debt has more than doubled from 31.7% of GDP in 2010 to 74.1% in 2023.
Demands from every department for bigger budgets help explain why targets are so difficult to meet. Moreover, these pressures are unlikely to subside anytime soon. As long as the budget structure lacks effective limits on spending, then even if officials manage their tasks properly, it can’t prevent targets from being missed. The problem does not entirely lie in how well it is carried out.
The problem is a structural flaw in how fiscal policy is managed and the absence of a clearly defined fiscal anchor to give Treasury a binding reference mark and prevent ad hoc shifts in targets. Each time a new target is announced, it seems less like a firm commitment and more like a placeholder for future revisions. This erodes the public’s trust and undermines investor confidence.
A non-negotiable baseline needs to be established to say: “Here is the limit, and this is how we stay within it.” This sets the stage for a fiscal rule to be introduced.
Option 2: A fiscal anchor
A fiscal rule or anchor is essentially a long-term numerical limit on budget figures like debt, deficits, or expenditure. There are several types of fiscal anchors and combinations thereof, each with its own strengths and weaknesses. This discussion does not focus on suggesting a specific anchor or the timeline for its implementation.
What matters is that a well-defined fiscal rule, one that is not overly complex and that primarily focuses on securing a debt-stabilising primary balance, can send a powerful signal to investors and credit rating agencies. Such an anchor, especially if it is in line with the International Monetary Fund’s 2022 recommendation for an anchor that strikes a balance between credibility, debt stabilisation, and flexibility, will help boost investor confidence, lower borrowing costs, and attract foreign investment. This will have a positive effect on economic growth.
Arguably the most important advantage of implementing a fiscal anchor is the structure it provides for difficult decisions Treasury has to make. A well-defined anchor will set firm guidelines on how to manage windfall revenues (for example prioritising reducing debt, tax cuts, increasing investment) and spending adjustments during economic downturns. This predictability protects the budget against abrupt changes that could otherwise destabilise the economy.
Guideline
Such a guideline is becoming increasingly important as government continues to weaken property rights through the Expropriation Act, which President Ramaphosa signed last week. The unconstitutionality of the Act remains a serious concern, and the question of its affordability has gone largely overlooked.
Even if only land may technically be expropriated without compensation, the Act itself permits the takeover of all types of property—some of which will require compensation. This alone introduces a range of fiscal uncertainties, from settling valuations with property owners to covering administrative and legal fees when those valuations are contested in court, and where the compensation will come from and in what form. A clear and well-defined fiscal rule can help safeguard consumers and property owners from paying higher taxes, only for the state to use those funds to compensate for property it has expropriated.
Beyond the question of how much is paid for each expropriated property, there is the practical issue of upkeep. Once the state assumes ownership, it becomes responsible for maintenance and related expenditures that have not been accounted for in any budget.
Furthermore, according to the Expropriation Act, existing property loans will remain the liability of the original owner. If compensation falls short of the outstanding debt, this will place severe strain on the original owner, who will no longer own the income-generating asset used both as collateral and as a means to repay the debt. The strain will ultimately transfer to the banking sector. If defaults on those loans spike, government could find itself propping up financial institutions. This adds another unplanned burden to the national balance sheet.
None of these costs—whether tied directly to compensation, litigation, administration, or potential banking fallout—have been formally budgeted for. This is what can ultimately be phrased a policy-driven spending risk, and it is the result of politics dictating the budget rather than the budget informing policy choices.
A well-defined fiscal anchor will help contain these risks by imposing a clear, non-negotiable guideline of boundaries on spending. It will help deter impulsive policies by ensuring that every new initiative, including further expropriations, must be weighed against well-defined fiscal limits.
The stakes could not be higher. Continuing to move the marker on our debt has already allowed the growth boat to drift further out of the port. Treasury is responsible for throwing anchor – and it must. A well-defined fiscal anchor would provide the discipline and accountability needed to restore fiscal credibility and set South Africa on course for a 7% growth rate.
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
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