South Africa’s National Treasury Proposes New Fiscal Anchor To Regain Fiscal Credibility

South Africa’s National Treasury recently proposed the introduction of a fresh fiscal anchor aimed at managing the mounting national debt and working towards the improvement of the country's financial credibility. The proposal, presented last week to President Cyril Ramaphosa, comes at a time when the Treasury warns of possible spending cuts to compensate for revenue shortfalls and a larger-than-projected budget deficit.

The surge in fiscal demands was further triggered by calls from various quarters for the government to extend a welfare grant of R350 ($19) monthly, initially introduced in 2020. Reducing spending seems set to be an arduous task for the African National Congress (ANC), which holds the reins of the government, particularly as it heads into contesting elections next year. The ANC faces critical projections of potentially losing its national majority for the first time since 1994.

Increasing value-added tax by 2%, restructuring and diminishing the number of government departments and state-owned enterprises, controlling the public-sector wage bill, and overhauling the skills development levy are among other proposals made by the Treasury.

The definitive fiscal rules suggested, which could include an upper limit on debt or a primary balance target, remain in deliberation at present. Finance Minister Enoch Godongwana has diverged, ruling out the introduction of a new fiscal anchor.

In the quest to ensure the government's debt burden doesn't return to an unsustainable trajectory, the Treasury made the primary budget balance as the nation's key fiscal anchor in 2021. Updated allocations and fiscal projections will be announced when Finance Minister Enoch Godongwana presents his medium-term budget policy statement on November 1.