Twenty-year review of South African fiscal policy: A tale of two sustainabilities

Abstract

In 2014 democracy in South Africa was 20 years old. The democratic government in 1994 inherited both a high and increasing public debt/gross domestic product ratio and significant development backlogs. The government had to establish fiscal sustainability, yet also pursue development in a sustainable way. This article explores the government's performance in reconciling fiscal sustainability with sustainable development. The article shows that fiscal policy has been sustainable over the 20 years, with some risks appearing towards the end, and that the government pursued sustainable development through reallocating resources within the budget and by spending more in real terms. Three phases can be identified: 1994–2000, 2001–08 and 2009–13. However, poor service delivery and low levels of government investment during the 20 years threaten to undermine economic growth. Lower growth consequently threatens the sustainability of both fiscal policy and development, which, in turn, again undermines growth prospects. Hence, the article also identifies key future challenges.

Keywords:

• fiscal sustainability
• sustainable development
• economic growth
• efficiency
• distribution

JEL codes:

• E62
• H6
• O23

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

³For an earlier attempt to assess fiscal policy in this manner, see Calitz & Siebrits (2010).

⁴For an outline of different concepts and definitions, also see Baldacci & Fletcher (2003:130–61).

⁵Our thanks to an anonymous reviewer for helping us formulate this narrower definition of sustainable development.

⁶This situation should be distinguished from the case where the current generation (and not a future generation) pays for its own increased benefits by also paying higher taxes. The only case in which the future generation has to pay for the current generation, yet does not end up worse off, is when the economic growth rate exceeds the real interest rate and does so for every generation in future – this is the so-called Diamond model (Diamond, 1965), which extends the concept of Pareto efficiency to an intertemporal basis. Unfortunately, as history shows, at times interest rates exceed growth rates.

⁷The commonly available public debt figures in South Africa refer to national government debt. Provinces cannot issue bonds, while local authorities can issue some debt but must service it from their own income. National debt also excludes the debt of public corporations (such as ESKOM). These institutions service their debt with their own income, which explains why their debts are excluded. In so far as national government provides guarantees (at a prices) to public corporations, it incurs a contingent liability. For South Africa the contingent liabilities are currently not excessive, although they do need to be monitored, as highlighted by the significant increase in ESKOM debt. See Calitz (2012) for a detailed study on this.

⁸Government bonds constituted 27.5% of the Public Investment Corporation's assets in 2008, before decreasing to 21.8% in 2013 (SARB, 2014).