Relative to earlier pessimistic views, budget was better than expected

A slightly adjusted version of a well-known John Maxwell quote speaks to SA’s fiscal path rather well: “Credibility is a country’s currency. With it, it is solvent. Without it, it is bankrupt.”

The 2021 budget was certainly better than expected relative to the Treasury’s far more pessimistic view back in October 2020. The budget deficit is now narrower as a percentage of GDP than before, but still the widest it’s ever been. The Treasury continues to push for debt stabilisation, thankfully at a lower peak of 88.9% of GDP in 2025/2026, and the one thing that keeps investors, citizens and other stakeholders willing to wait and see is the credibility of the fiscal plan to get there.

So what is a credible fiscal policy? It is the perception that the government will achieve its fiscal proposals as planned, and it therefore determines the government’s solvency and ability to borrow. It is not the ideal fiscal policy as this is something determined by the presidency in conjunction with the Treasury. It is not an extremely rigid budget whereby medium-term adjustments are impossible, for the credibility of a Treasury should in itself allow for adjustments where necessary. Credibility also takes time to build up, and consistency (broadly sticking to the plan), institutional support (the SA Revenue Service and SA Reserve Bank are fine examples), and sometimes fiscal rules (via the revenue, expenditure or borrowing side of the budget) are helpful in this regard.

The tricky side of it all is measuring fiscal credibility. The sovereign rating methodology of ratings agencies is a place to start, showing that deteriorating fiscal strength can be both an economic and an institutional problem. Moody’s downgrade decision late in 2020 illustrates that not only is SA’s fiscal strength deeply in subinvestment grade territory (C-rated), but it is now far lower than Brazil (B1 rated) because SA’s rapid accumulation of debt, and the inability to stick to a consistent fiscal plan, was no longer tolerable. As such, the institutional strength measure also fell one notch and now sits on the cusp of subinvestment grade, strongly suggesting that fiscal credibility is not what it once was.

From financial markets to business, labour, the media and the public, stakeholders use many criteria in determining fiscal credibility, but broadly one considers whether fiscal policy is realistic (against the consensus macro and political outlook), responsible (does it support long-term sustainable and inclusive economic growth?), prudent (does it provide protection against unforeseen events?) and transparent (can analysts stress-test the fiscal projections?).

The 2021 budget is therefore a chance to see whether the country has taken a step in the right direction to recoup some of its fiscal credibility.

Is the budget realistic? A first glance suggests a difficult trade-off between socioeconomic needs and financial market wants. Of course, social grant top-ups are necessary when an economy has experienced the crisis of a pandemic, but is the additional amount spent tolerated by those holding government bonds? This is where a joint effort between the Reserve Bank and the Treasury in sharpening the understanding of fiscal multipliers is important.

The Treasury has used its budgets to prove where expenditure items have low versus high multiplier effects on the economy. Low fiscal multipliers, such as the above-inflation public sector wage trend over the years, provide justification to stick to existing plans to reduce such expenditure. But when a fiscal multiplier is high, such as paying for vaccinations and extending social grant top-ups, additional expenditure can be justified.

Essentially, the realism of the fiscal path is determined by how strongly the economy can grow, revenue collection and the expenditure plans against this. The scrapping of the R40bn tax measures makes the growth picture somewhat more realistic, but more evidence of reform measures will be necessary to explain how the outer years continue to improve.

Is the budget responsible? The messaging indeed appears responsible, to quote from the budget itself: “The 2021 budget provides continued support to the economy and public health in the short term without adding to long-term spending pressures.” 

Overall, the commitment to maintain expenditure on items that bolster inclusive and stronger growth (vaccines, health, infrastructure) and reduce expenditure on items that are less helpful now (overly high pay in the public sector wage bill) is fiscally responsible. But not everything is perfect. There are some areas, such as continued fiscal support for poorly managed state-owned enterprises, that remain a feature of the budget.

Is the budget prudent? Again the messaging suggests the Treasury prefers the conservative route, especially with regard to unforeseen expenditure: “Government’s balanced and prudent fiscal strategy is designed to stabilise the public finances.” The reduction in bond issuance to relieve the debt-servicing cost burden is indeed a prudent choice as opposed to ramping up expenditure with the revenue overrun of the 2020/2021 financial year, especially given SA’s track record of a lower overall fiscal multiplier over the years. Bumping up the contingency reserve in case of additional Covid-19-related expenditure (especially on the vaccine) is prudent.

Is the budget transparent? This is one of SA’s fiscal strengths, as seen in the Open Budget Index Survey, where SA has enjoyed top ranking for many years. The detail of the budget allows independent analysts to assess the projections, consider the GDP underpin and the government’s aspirations in achieving what it plans to.

SA wants a realistic, responsible, prudent and transparent budget, but across these criteria it has struggled most so far with the realism of its fiscal plans. The 2021 budget is indeed a step in the right direction in recovering fiscal credibility as consecutive budgets with a similar fiscal plan have been extremely rare in recent years.

And so, to paraphrase another popular saying, “credibility is difficult to earn, easy to lose and, once lost, almost impossible to regain”. SA must not be careless with its fiscal credibility. It may be the difference between a solvent and insolvent country.

• Schoeman is Citi SA economist and research head.