Adviser pushes back on fiscal anchor
The Parliamentary Budget Office (PBO) believes that the fiscal anchor proposed by the National Treasury will worsen SA’s financial challenges.
The Treasury announced in last week’s Budget Review that it was working on a fiscal anchor and that in the meantime the achievement of a primary budget surplus (when revenue exceeds non-interest government expenditure) would serve as one. “Fiscal anchor” refers to a binding constraint on fiscal policy which would require the Treasury to adopt a specific policy approach.
“To chart a sustainable, longterm plan for the public finances, government will, after extensive consultation, propose a binding fiscal anchor. This will secure the benefits of fiscal consolidation and ensure that permanent fiscal imbalances do not reappear in a way that requires future adjustments. Over the medium term the debt-stabilising primary budget surplus will anchor fiscal policy,” the Treasury said in the Budget Review tabled last week in parliament.
The budget office, which advises parliamentary committees on budgetary issues, and the Financial and Fiscal Commission (FFC) presented their views on the budget to parliament’s four finance and appropriation committees. Public hearings will be held on Wednesday.
The budget office was concerned “the National Treasury intends to introduce arbitrary fiscal rules/anchors that are not supported by empirical evidence or economic realities for their effectiveness”, said its economic analyst, Tshepo Moloi.
“An arbitrary fiscal anchor would compel the government to repeatedly revise expenditure and undermine the efficacy of government’s ability to plan and implement programmes over a long term. Fiscal anchors may hamper the flexibility of fiscal policy to respond to challenges.
“The increasing risk of future crises and contagion related to the possibility of future pandemics, climate change-related events, financial instability and political turmoil reinforces the case for fiscal flexibility.”
He added that a narrow focus on budgetary-related variables, such as the deficit and debt, blinkered the government to the important developmental role the budget could play in reducing unemployment, poverty and inequality and in enhancing the quality of people’s lives.
“Fiscal anchors could lead to expenditure cuts that negatively impact economic growth and cause debt-to-GDP levels to increase, particularly in recessions and crises where private sector household consumption and business investment are likely to remain low.”
The PBO reiterated its longstanding position that the budget should be used to promote economic growth. Deputy director for economics Seeraj Mohamed stressed that fiscal policy could promote growth and development through higher government spending even though in the short term this might see a rise in debt to GDP.
“The National Treasury’s fiscal policy approach will constrain economic development and exacerbate unemployment, poverty and inequality over the medium term,” PBO director Dumisani Jantjies said.
“One of the pressing problems facing SA is the absence of faster and sustained inclusive growth. SA needs to improve productive capacity, human capital and state capability mainly through investments to address unemployment and livelihood insecurities.”
Fiscal consolidation had caused reductions in real per capita expenditure on health, education and other sectors critical to the basic survival of the majority. Fiscal consolidation resulted in lower growth, an increase in debt levels and a higher budget deficit.
“Economic growth and fiscal sustainability could be stimulated by directing more resources towards struggling poor households, public services and infrastructure development in pursuit of a new demand-led growth trajectory,” Jantjies said.
The FFC said that while the use of the gold & foreign exchange contingency reserve account — Treasury will use R150bn over three years from the account to reduce debt and debt service costs — would improve the debt outlook “it appears to be applying a shortterm solution to a structural problem. For the commission, the focal point is the question of whether the cost and risk of defraying foreign exchange reserves justify the myopic relief to the current fiscal problem to address structural fiscal deficits.
“To resolve SA’s debt crisis, the focus should be on tackling the underlying fiscal challenges and implementing structural reforms to achieve greater efficiency and productivity.”