DA’s proposed fiscal rules come under scrutiny

While the South African government and its workers try to navigate entrenched stalemates on the public sector wage bill, lawmakers are considering legislating debt ceilings.

As South Africa’s government and public sector unions continue to lock horns in wage negotiations, lawmakers are considering a new DA-sponsored bill aimed at reducing the country’s debt.

In its current form, the Fiscal Responsibility Bill proposes fiscal rules – spending targets set by governments to temper future borrowing – that would see public sector wages slashed to lower the ratio of national debt to economic growth.

The bill recommends freezing public sector wages once the national debt is between 50% and 55% of the country’s economic growth in order to achieve a budget surplus. If the debt grows to between 55% and 60% of economic growth, it recommends cutting wages by 5% to maintain a surplus. And once national debt exceeds 60% of economic growth, it proposes cutting wages by 10%.

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In a February budget whose social spending cuts led some experts to question its constitutionality, Minister of Finance Tito Mboweni announced a freeze to the public sector wage bill. His department’s apparent recent softening to a 1.5% wage adjustment for public sector workers has come under criticism from organised labour, including a municipal worker picket in Pretoria on 2 June.

Debt ceilings have had mixed results, with some success in places such as New Zealand and certain Scandinavian countries, which have lower developmental demands than South Africa. Others have been suspended in the wake of extra public spending demanded by the Covid-19 pandemic, including in the European Union, Colombia and Brazil, while the United States regularly breaches its debt ceiling.

Criticisms and concerns

The range of debt-to-growth ratios and wage cuts set out in the bill, which was first introduced in parliament in March 2020, were criticised at public hearings on 2 June. The acting head of the National Treasury’s budget office, Edgar Sishi, said the metrics had “no technical justification”, while the parliamentary budget office called them “arbitrary and unexplained”.

South Africa’s debt outlook has been systematically eroded by growth that’s been lower than projected since a commodity supercycle in the mid-2000s. Sishi said until slow growth was addressed, implementing the fiscal rules that are contemplated in the bill ran the risk of worsening the country’s debt outlook.

The ratio between debt and growth depends on macro-economic changes beyond the ambit of fiscal policy, such as interest rates and economic growth. Exchange rates are another. Because some of South Africa’s debt is in foreign currency, the amounts the country owes can change on any given day without fiscal policy input. Tying policy makers to a ratio beyond their control would produce volatility in fiscal decision making, said Sishi.

24 February 2021: Minister of Finance Tito Mboweni delivers his budget speech in the National Assembly in Cape Town. The National Treasury has also criticised the DA’s bill. (Photograph by Jaco Marais/ Die Burger/ Gallo Images via Getty Images)

While the proposed bill does not provide any evidence that fiscal rules wouldn’t require further cuts to government spending, the parliamentary budget office estimates that spending would have to be reduced by R213 billion in the current financial year, by R109 billion next year and by R50 billion the year after. This amounts to what the office called “significant fiscal austerity”.

Although a global boom in commodity prices over the past year is likely to offset some of South Africa’s immediate debt concerns, trade union federation Cosatu said it was “deeply alarmed” by the current levels of national debt and conceded that the country could enter a debt trap within the next two years. Along with a handful of other countries like Mexico and Brazil, South Africa is projected to suffer chronically low growth and high interest rates.

The federation, whose member unions represent the majority of unionised public sector workers, nevertheless rejected the bill in its current form, with its parliamentary coordinator, Matthew Parks, calling it “anti-worker” and “unconstitutional”.

Commodity cycle traps

Sishi said the current bill was also likely to promote procyclicality – when fiscal policies become tied to commodity price cycles and governments overspend during boom periods. Many emerging economies have struggled to insulate their fiscal policies from commodity booms and busts. A typical example was the oil-based Mexican economy from the 1960s until the 1980s. Ecuador, Argentina, Bolivia and Venezuela have also recently increased public spending on the back of high commodity prices.

But speaking at the recent launch of the Southern Centre for Inequality Studies’ public economy programme, Chilean economist and former politician Andrés Velasco suggested that fiscal rules could be used as a measure to stave off procyclicality.

During his time as Chile’s minister of finance for the Socialist Party government from 2006 to 2010, Velasco, who is now dean of the London School of Economics’ school of public policy, changed policy from annual budgeting to a fiscal rule that guided expenditure over longer horizons and constrained spending it during that cycle.

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Unlike the fiscal rules currently under consideration in South Africa’s National Assembly, these rules were based on long-term income estimates and not debt-to-growth ratios. As a result, Chile, the world’s biggest copper producer, held more assets than debt in the lead-up to the 2008 financial crash and, according to Velasco, was able to return to economic growth after only six months, compared with six years in parts of Europe.

The South African Federation of Trade Unions (Saftu) joined Cosatu in dismissing fiscal rules as a path out of the country’s looming debt crisis. While Saftu would support this sort of fiscal prudence if it “ensured the state institutions and enterprises responsible to offer public goods and services continue to operate efficiently,” the government needs to be spending more, “even during booms” but especially in a context of collapsing public institutions, said Trevor Shaku, the federation’s national spokesperson.

Shaku said “public spending should not be determined by a fiscal rule guided by neoliberal logic, but by the need in the public sector”. He went on to dismiss the debt-to-growth ratio as “a myth” that is “used to scaremonger and motivate for lesser expenditure on public goods and services”

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