Fiscal rules: empty bark or ability to bite?
As we head for the 2024 budget speech on Wednesday it is thought that finance minister Enoch Godongwana may announce fiscal rules, but observers wonder whether these will be merely symbolic gestures or include substantive enforcement mechanisms.
Will they be merely for signalling, essentially a bark, or more binding, designed with teeth and the capability of biting?
Fiscal rules are formally adopted numerical anchors or targets intended to improve a government’s fiscal sustainability. These anchors or targets can take on various forms, such as setting limits on public expenditure growth, government debt-to-GDP ratios or government budget balances.
Such rules are not new. There are 105 countries that have formally adopted some form of numerical fiscal rules. Some even enshrine them in their constitutions, such as Brazil, Germany and Denmark.
SA is one of the countries that does not have formally adopted fiscal rules. Although there is an expenditure ceiling, it is not formally and directly adopted other than to appear in budget documentation such as the National Treasury’s Budget
Review. It is not a binding measure, and it is not recognised as a fiscal rule in the IMF fiscal rules database.
The most recent Eskom bailout is a good demonstration of how to work around the ceiling. It also arguably showed how to artificially record a primary balance. All of this potentially erodes fiscal credibility.
The push to establish formal fiscal rules in SA goes back to at least 2018, when the official opposition in parliament initially proposed the adoption of statutory fiscal rules. This was followed by a recommendation from the IMF.
COMMITMENT
In 2019, the National Treasury indicated that it was investigating measures to anchor fiscal sustainability. This culminated in a commitment in the 2023 medium-term budget policy statement (MTBPS) that further details on fiscal rules would be provided in the 2024 main budget.
Should fiscal rules indeed be announced on Wednesday, the critical question lies in whether they will be binding, externally and independently enforceable, and designed in such a way as to minimise the potential for creative accounting.
A recent example from Germany demonstrates that fiscal rules can be designed to be binding and externally enforceable. In November, Germany’s constitutional court ruled that a budget passed in the Bundestag violated Germany’s fiscal rules. This was after MPs challenged the budget in court. The result was the freezing of expenditure of €60bn. This mechanism allows anyone in Germany to challenge budgets passed in the Bundestag that violate these rules.
On the topic of creative accounting, a common risk is unrealistic and overoptimistic forecasting to comply with rules. For example, governments may feel the urge to overestimate revenue to comply with fiscal rules that place limits on government budget balances. Or governments may overestimate GDP growth to comply with government debt-to-GDP ratios.
INDEPENDENCE
One way to mitigate this risk is to have external and independent forecasting. This could involve institutions such as the Financial & Fiscal Commission, the Reserve Bank or a combination of private and public stakeholders.
While an announcement may signal fiscal responsibility, without it having teeth and the potential to bite it could be perceived as mere posturing, failing to yield substantive benefits or bolster credibility. In such a scenario it would render only short-lived, marginal benefits, if any, and could erode credibility further if such rules are designed to be violated.
Fiscal rules have the potential to help SA move towards a more sustainable fiscal trajectory. However, for that to materialise it must transcend symbolism and possess robust enforcement mechanisms capable of ensuring compliance.
Botha, an independent analyst focused on public finance and fiscal policy who is reading for a master’s degree at the London School of Economics & Political Science, was a strategic analyst in the Western Cape department of finance & economic opportunities.