Treasury introduces fiscal anchor to contain debt surge: But SA must do budget cuts right

South Africa’s National Treasury has unveiled a strategic proposal to combat rising debt and restore fiscal credibility, introducing a new fiscal anchor. Finance Minister Enoch Godongwana has called for a significant reduction in state expenditure, citing a need to align it with constitutional requirements. As South Africa grapples with its fiscal challenges, Minister Godongwana’s call for fiscal restraint finds support from the Free Market Foundation. The nation faces pressing decisions on budget cuts, civil service reform, and the fate of controversial programs, sparking a critical dialogue on fiscal responsibility and government efficiency. This fiscal discipline is essential to address economic challenges, corruption, and mismanagement within South Africa’s government.

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South Africa Weighs New Fiscal Anchor to Help Contain Debt Surge

By S’thembile Cele and Monique Vanek

(Bloomberg) — South Africa’s 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 the 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 350 rand ($19) monthly welfare grant that was introduced in 2020.

Curbing spending will be a tough task for South Africa’s governing African National Congress, 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. The Congress of South African Trade Unions, the country’s biggest labor group and an ANC ally, has already rejected budget cuts.

Data released by the central bank in June showed the Treasury missed its target of achieving a primary budget surplus in the 2022-23 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 seen by Bloomberg. The proposed changes are still under discussion and it’s unclear exactly what the Treasury favors. 

The rules, which should preferably be legislated “should be set in accordance to a desired target and include a mechanism which government can control,” it said. The 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.”

The 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 value-added tax by 2%, closing programs, 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 Nov. 1.

The Treasury’s proposals were first reported on by Johannesburg’s Sunday Times newspaper. 

–With assistance from Rene Vollgraaff.

© 2023 Bloomberg L.P.

Budget cuts? It’s about time. Minister Godongwana, let’s do it properly! 

By Martin van Standen*

The Free Market Foundation (FMF) has responded favourably to finance minister Enoch Godongwana’s desire to bring fiscal restraint and discipline to South Africa’s public sector. Government spending needs to be reined in and align far more strictly with constitutional requirements. 

The National Treasury has indicated that state expenditure must come down by at least R25 billion. While this may seem like a large amount, recall that the 7.5% public sector wage increase granted from 1 April added R37 billion to the government’s bill. In the absence of this increase for underworked and overpaid government employees, this ‘austerity’ crisis would have been far less pressing or severe. 

Ultimately, it comes down to how much we are spending on civil servants, including indebting ourselves to do so. 

Here is an adapted version of a letter that I submitted to the minister this week on behalf of the FMF. 

*                      *                    * 

Dear Minister Godongwana, 

The Free Market Foundation has taken note of recent statements by yourself and National Treasury highlighting the importance of budget cuts and fiscal restraint in the area of government spending. We acknowledge that while we regard this as good news, you and your colleagues – and certainly the trade union movement – might consider it regrettable. 

It is quite likely that you will be advised at some juncture that proposals to cut spending are somehow unconstitutional. We would consider such a notion to be unsound and without basis in the Constitution. 

As recent research by Russell Lamberti of the business group Sakeliga shows, government finances have deteriorated substantially in recent years. Government is hugely indebted, and tax revenue has long been behind what government seeks to spend. Fiscal prudence is very necessary in this context. 

While one can debate what the proper role of government in our society should be, what we consider to not be debatable is the fact that personal and then community responsibility must come first. We fear that government interference in various areas of social life has had the effect of crowding out this responsibility, which has in turn had detrimental downstream consequences for the economy. Had government done less, the private sector would have grown to meet the demand for services government would otherwise have provided, in the process creating more employment and economic activity. 

As such, the Free Market Foundation, not wishing an opportunity for substantive reform to be missed, proposes that if National Treasury is today aware of the importance of fiscal responsibility, that certain policy initiatives be abandoned, and that the size (and also scope) of Cabinet portfolios be substantially reduced. Much of this falls outside of your or Treasury’s direct authority, but we believe you are the best vehicle to advocate these proposals among your colleagues. 

As neither of these policies have become operative yet, there is still time for government to completely abandon the misguided National Health Insurance (NHI) scheme and the Basic Income Grant (BIG) proposal.  

Neither the NHI nor the BIG is something South Africa’s taxpayers can afford. It must also be realised that both these proposals are misguided responses to prior government failures. Had South Africa’s existing public healthcare system – already ‘free’ for end-users – been properly managed and staffed, no NHI would have ostensibly been necessary. Furthermore, had government policy not crippled the job market and economic growth in this country, there would be no talk of a BIG.  

Both NHI and BIG, in a way, therefore are the fruit of a poisonous tree, and must be abandoned. 

Secondly, the unwieldiness of the Cabinet is well-documented in South Africa’s public discourse. That Cabinet is a vehicle for political patronage rather than constitutional government seems to us to be an unavoidable conclusion. South Africa is not a wealthy country, and has a very limited tax base. As such, it baffles the mind that anyone could argue that portfolios like ‘Arts and Culture’ and ‘the Environment’ are appropriate. 

The Free Market Foundation therefore proposes a significant reduction in the size of Cabinet. 

As you will know, the text of the Constitution only mandates the existence of the Cabinet portfolios of President, Deputy President, Finance, Cooperative Governance, Justice, Defence, and Police. Additional portfolios may be required by necessary implication, but those that are not required explicitly or implicitly are simply discretionary – and South Africa has too many of these discretionary portfolios, costing the taxpayer dearly. 

The Free Market Foundation proposes that the current Cabinet be reduced to only 10 bureaucracies. 

The new Cabinet, if the proposal is adopted, would be organised as follows: 

  • Presidency. This department would administer both the portfolios of the President and Deputy President. 
  • Finance. 
  • Defence. This department would include the apparatuses that currently fall under the State Security portfolio. 
  • Justice 
  • Home Affairs. This department would include both the portfolios of Police and Correctional Services. The standalone Departments of Police and of Correctional Services would fall away. 
  • International Relations. This department would include aspects of the current Trade, Industry, and Competition portfolio, in particular those relating to international trade. The existing Department of Trade, Industry, and Competition would fall away. 
  • Public Service. This department would include the existing portfolio of Planning, Monitoring, and Evaluation. 
  • Public Works. This department would absorb in their entirety the current portfolios of Transport, Electricity, and Water and Sanitation. It would also include aspects of the Agriculture, Land Reform, and Rural Development, and Forestry, Fisheries, and the Environment portfolios. 
  • Cooperative Governance. 
  • Social Development. The Departments of Basic Education, Higher Education, Health, and Human Settlements would fall away. In their place, the Department of Social Development would administer a comprehensive voucher programme that pays for the basic education, healthcare, and housing needs of indigent citizens. The Department of Labour and Employment, similarly, would fall away, and its necessary regulatory functions would fall to this department – and this would also be the case for aspects of the Forestry, Fisheries, and the Environment portfolio. 

The portfolios that would be scrapped – with the default assumption that their functions cease to exist and that the private sector step into the breach – are Mineral Resources and Energy; Women, Youth, and Persons with Disabilities; Small Business Development; Sport, Arts, and Culture; Tourism; Science and Innovation; and Communications and Digital Technologies. 

Any remaining functions of the scrapped portfolios that are deemed to be central to government’s constitutional obligations – such as those involving the Agriculture, Land Reform, and Rural Development, and Labour and Employment portfolios – must be devolved to the municipal and provincial spheres of government. 

The Free Market Foundation believes that fiscal responsibility is a public virtue, not something to be embarked upon begrudgingly. What we have proposed here does not threaten the provision of public services or the enjoyment of constitutional rights. Instead, it makes for more efficient and effective, and in particular more disciplined, government. We ask that you consider these proposals seriously. 

Yours sincerely 

Martin van Staden 

*                      *                    * 

Focus is necessary 

As an isolated voice of reason in South Africa’s lumbering state bureaucracy, one hopes Enoch Godongwana takes this message to heart. The odds are not in his favour. 

Some of the government’s biggest spending items are servicing its own debt and paying the wages of underworked civil servants. Taxes have long been insufficient to cover what the government wants to spend, which means that it needs to borrow. But what is borrowed must be paid back, which is a tall order when tax revenue is insufficient, and the economy shows no signs of growing. 

This is a perverse cycle that can only be ended with serious expenditure cuts. 

After all, for an African country with millions unemployed and millions more relying at least partly on welfare grants, what business does government have with a Department of Sport, Arts, and Culture? Why is the Department of Higher Education burdened by a Science and Innovation portfolio? 

All these things are important, but the taxpayer cannot afford government spending its time and limited resources on these matters. If one believes – and I do not – that government has a so-called ‘developmental’ role to play in society, then one must agree that government must focus. The South African government is not focused. 

Some might retort – as the Daily Maverick has – that health, education, and law enforcement might be the biggest victims of budget cuts, and these are surely part of a developmental state’s focus. 

What is missed in such a retort is that South Africa is by any reasonable standard actually overspending in these areas when the spending is compared to the return on investment. Reducing spending, then, is a necessary disciplinary move rather than an example of unfair austerity.  

The problem is not a lack of funding, but rather corruption and mismanagement in healthcare, complete and utter incompetence in education where only five or six in every 22 primary school teachers can identify the main idea in a simple written paragraph and do simple arithmetic, and a so-called ‘police service’ that is usually nowhere to be seen when crime occurs. This ignores the inefficiencies inherent in government service provision and a general sense of lackadaisicalness among civil servants.  

South Africa needs a civil service that takes its job seriously, not a civil service that demands ever more money for little work. 

Holistic view necessary 

Budget cuts and the dire need for them is not something that happens in a vacuum, however. A holistic view of what is happening is necessary. 

(Involuntary) public expenditure reductions would not be necessary under circumstances of a well-performing economy. But the economy cannot perform well when the government stifles growth with bad policy, and it cannot perform well when the civil service is regarded as a vehicle to create jobs for those who cannot find work in the productive sector.  

If the economy were growing and people had productive employment, the state would collect significantly more revenue and have significantly bigger budgets. To get to this point, we need the government to drop the peripheral items that it concerns itself with and focus on its core constitutional mandates. Alongside this focus must be a renewed push for top-quality public officials assessed on merit only.  

In other words, we do not simply need more teachers, doctors, or police officers. We would derive far greater benefit from having significantly better teachers, doctors, and police officers than from simply swelling their ranks. 

If the police were not hanging around largely safe suburbs but focused on crime-ridden areas, we would not need as many of them. If metropolitan police were not fining people at the side of the road in Sandton, but instead patrolling crime hotspots, we could afford having fewer of them. But because decision-making is so centralised in South Africa, those at the very top often have nothing other than raw numbers of staff to base their decisions on. Devolution and decentralisation would go a long way towards ensuring that dedicated administrators on the ground can make more informed decisions about resource allocation within their local contexts.  

This applies to hospitals and schools just as much as it does to the police. 

None of this is possible, of course, while government maintains a demonstrably tainted ideological agenda. A government whose ideology is premised on the notion that we must transform everything will necessarily run into budget deficits, because its scope (but mercifully not its competence) is totalitarian in character. 

And this ideological dedication – although corruption is also a powerful motivating force – also holds the dangers of what government may do when its finances are constrained.  

While tinfoil hat-wearing nuts like to claim the Reserve Bank is a private institution beholden to private interests, the reality is that it is a statutory creation that will invariably take its instructions from the national executive authority. If the Cabinet adopts a resolution ordering the Reserve Bank to print money, there might be some resistance, even some litigation, but in the long run it will not be able to act completely independently.  

Printing money is a very short-term ‘solution’ (a presumptuous term!) that will very quickly lead to the devaluing of the rand – after all, increasing the supply of rands will always reduce the value of the existing rands in circulation – and ultimately destroy the economy entirely. Printing more money to cover budget shortfalls must not even enter our minds as an option available to us, but it is always close to the heart of desperate governments. 

This is why the trade unions, civil society, and commerce, must welcome the announcement of spending cuts, and make it clear to government that this is a responsible move worth embracing. Hysterically criticising the cuts as attacks on the poor and putting pressure on government to consider alternatives has the potential of causing more harm than good. 

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*Martin van Staden is the Head of Policy at the Free Market Foundation and former Deputy Head of Policy Research at the Institute of Race Relations (IRR).

This article was first Daily Friend and is republished with permission