The International Monetary Fund (IMF) defines fiscal consolidation as “a reduction in the government primary budget deficit from its pre-consolidation level.” In essence, it is the process of reducing government deficits and debt levels through a combination of spending cuts, tax increases, or a combination of both to improve a government’s fiscal position. Its objective is to bring government revenues and expenditures into balance or surplus over time and maintain long-term fiscal sustainability. Keynesian economic theory advocates for fiscal consolidation during periods of economic expansion or prosperity to prevent the economy from overheating, thus controlling inflation, and ensuring stability in the long term. In contrast, during economic downturns or recessions, Keynesian theory proposes an opposite approach, namely, increasing government spending and cutting taxes to stimulate demand and boost economic activity.
Having observed surges in public debt in many countries since COVID-19, in 2023 the IMF published a working paper on fiscal consolidations[1]. It found that successful fiscal consolidations are usually underpinned by a credible commitment to reform and sound programme design. Crucially, it identified three pre-existing conditions for successful fiscal consolidations. First, it found that high income levels and favourable global and domestic conditions tend to increase the probability of success. In this regard high-income OECD countries are likely to succeed relative to emerging market economies, and similarly emerging market economies tend to succeed better than low-income developing economies. Secondly, the quality of fiscal institutions is considered key to the success of consolidation programmes. This is borne from the fact that countries with quality institutions have a good track record in fiscal management. Thirdly, consolidation efforts should have broad-based political support to be successful. Notably, the IMF Working Paper observed that coalition governments had a less successful track record due to challenges in building consensus. This is a very relevant observation for South Africa because it is anticipated to embrace coalition government in its next administration later in the year.
In the 30 years of democracy, South Africa had only 13 years in which it achieved successful fiscal consolidations. In the period 1994 – 1996, under President Nelson Mandela, Finance Minister, Chris Liebenberg, grappled with eliminating apartheid debt and boosting economic growth. Before democracy the economy had been growing at the pedestrian rate of about 1 percent. When President Mandela took reins, the economy started growing at an annual rate of over 2 percent. When Chris Liebenberg retired in 1996 due to health reasons, Trevor Manuel, who was previously Trade and Industry Minister, took over the reins as Finance Minister and fast tracked the economic reforms which had been started by his predecessor. In the period 1996 to 2007 South Africa saw itself achieving annual growth rates of about 4 percent and having budget surpluses. It even achieved a sovereign rating of one notch above investment grade during that period.
When new administrations came into office starting in 2008 and then 2018 to date, growth rates tumbled back to apartheid pedestrian rates of just 1 percent and less in some years. The pedestrian economic growth is attributed to many factors such as corruption, collapse of infrastructure (especially the logistics sector), energy shortages (resulting in load-shedding), and public mismanagement, among others. Fiscal consolidation disappeared in the scheme of things except being mentioned to give a semblance of undertaking economic reforms when nothing was happening on the ground. One could argue that they were applying the corollary of Keynesian theory that in downturns government should increase expenditure and cut taxes to boost demand. Unfortunately, the increase in government expenditure was skewed towards consumption and not productive expenditure. In fact, the downturn was engineered by bad policies rather than arising from external factors. Where productive expenditure was occasionally undertaken it was done wastefully and riddled with corruption. The exponential cost overruns in building new power plants – Medupi and Kusile – typify the wasteful nature of productive capital expenditure which has not made a dent in resolving the energy crisis. Budget surpluses quickly disappeared, and debt levels rose to the present level of over 70 percent of GDP from 30 percent levels in 2007. Unplanned bailouts of inefficient SOEs became a common feature, now typically accompanied with conditionalities that are not followed through. The ever-ballooning public wage bill has risen to become an albatross around the government’s neck and government seems to have no idea on how deal with it except National Treasury’s occasional promise that natural attrition (not replacing retirees and voluntary resignations) would miraculously solve the problem.
South Africa is facing a perfect fiscal storm. SOEs are engaging in quasi-fiscal activities (that is, activities that have fiscal implications but are not explicitly reflected in the government budget). They have become unpredictable fiscal booby traps that are triggering unplanned bailouts without notice. The budget presented by the Minister of Finance Enock Godongwana on 21 February 2024 is therefore rendered partly fiction. Why? It has not budgeted for SOEs quasi-fiscal activities that will result in unplanned bailouts. It has not budgeted for unrestrained public wage increases that will be engineered by combative trade unions. It has not budgeted for bailouts of insolvent municipalities. It has not budgeted for many other government off-balance sheet activities that will crop up like fiscal booby traps. Hence, it will spectacularly fail to meet its targets just as the previous year’s budget. Remember, the previous year’s budget had a forecast of a budget deficit of 4 percent to GDP, but the outcome was almost 5 percent. If targets are perennially not met, fiscal consolidation becomes akin to a dog chasing its tail. Treasury is simply engaged in a vicious merry go around. In its 2024 Macroeconomic Policy: A Review of Trends and Choices, Treasury acknowledges the dilemmas it faces. In one of its concluding statements, it states: “Monetary policy goals have broadly been achieved, albeit that some adjustment to the framework may be desirable given inflation differentials compared to our peers and trading partners. In fiscal policy, however, sustainability has not been achieved”. Then ominously, it went on to state that in the absence of meaningful economic growth as is currently the state, the existing fiscal policy is not sustainable.
Notwithstanding the gloomy outlook, hope should not be all lost because with political will South Africa has some ingredients that can enable it to achieve successful fiscal consolidations. It has strong fiscal institutions and a previous good track record in fiscal management that only needs to be rekindled. All that is required is for policymakers to have commitment to whatever consolidation programme they adopt so that it has fiscal credibility. The IMF defines “fiscal credibility” as the public’s confidence in the government’s fiscal consolidation and its ability to achieve its commitments. It is what the South African government should strive for going forward to rebuild fiscal buffers and ensure debt sustainability, underpinned by both revenue and expenditure measures. This can be achieved by instituting more robust governance, better accountability, and stronger financial management of SOEs, while mobilizing revenues to offset additional expenditure policies.
[1] Balasundharam et al. (2023). Fiscal Consolidation: Taking Stock of Success Factors, Impact, and Design. IMF Working Paper WP/23/63, International Monetary Fund: Washington D.C.
