National treasury proposed introducing a new fiscal anchor as part of measures to contain rising debt and regain the country’s fiscal credibility.
The recommendation forms part of a plan presented to President Cyril Ramaphosa last week. Its submission came after treasury warned that spending cuts may be needed to counter revenue shortfalls and a wider-than-expected budget deficit. Fiscal pressures have been compounded by calls for the government to extend a R350 monthly welfare grant that was introduced in 2020.
Curbing spending will be a tough task for the governing ANC, given that it’s due to contest elections next year and opinion polls show it’s in danger of losing its national majority for the first time since it took power in 1994. Cosatu, the country’s biggest labour group and an ANC ally, has already rejected budget cuts.
Data released by the Reserve Bank in June showed national treasury missed its target of achieving a primary budget surplus in the 2022/2023 fiscal year, which would’ve been the first positive balance since the global financial crisis.
Regaining long-run “fiscal credibility will require South Africa to adopt fiscal rules”, which include anchors such as a debt ceiling or primary balance target and stronger budget processes, like life-cycle costing for capital projects, according to a copy of the treasury presentation. The proposed changes are still under discussion and it’s unclear exactly what treasury favours.
The rules, which should preferably be legislated “should be set in accordance [with] a desired target and include a mechanism which government can control”, it said. Treasury warned that the proposed changes were not a panacea for the country’s problems, and the government will still have to stay the course when it came to ensuring there was “a clear and stable macroeconomic framework, more rapid and decisive implementation of economic reforms and improved state capability”.
Budget balance
National treasury made the primary budget balance — instead of a spending ceiling — the nation’s most critical fiscal anchor in 2021. A year later, budget review documents showed it was exploring a more robust option, partly to ensure the government’s debt burden didn’t return to an unsustainable trajectory. Finance minister Enoch Godongwana subsequently ruled out introducing a new anchor.
Other proposals made by treasury include increasing VAT by 2%, closing programmes, reducing or merging the number of government departments and state-owned enterprises, managing the public-sector wage bill, and reforming the skills development levy.
Revised spending allocations and projections will be given when Godongwana delivers his medium-term budget policy statement on 1 November. — S’thembile Cele and Monique Vanek, with Rene Vollgraaff, (c) 2023 Bloomberg LP
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