By Saliem Fakir · 25 May 2012
A sign of a government that cares about its citizens is reflected by the degree of effort it puts into thinking about the future rather than just the demands of the present.
As South Africans we are not there yet, but we may be getting there soon.
In October 2012, the National Treasury is looking to publish a document on long-term fiscal planning (LTFP). The idea was first mooted by Minister of Finance, Pravin Gordhan, in his October 25, Medium Term Budget Policy Speech last year.
It will be the first time such an idea is implemented within South Africa’s financial planning system. The implications for planning and fiscal provisions for the future are immense.
Few countries use long-term fiscal projections, but there are some forward thinking governments that do. Among them, Australia that publishes an inter-generational report, Denmark that has integrated long-term projections and New Zealand, which requires its treasury to produce a statement for its 40-year long-term fiscal position, every four years.
LTFP is an attempt to balance the focus away from monetary policy - such as inflation targeting and supporting exchange rates - to long-term fiscal stability where the government’s role in stimulating economic growth in times of economic crisis or stagnation is enhanced.
LTFP seeks not only to cover systemic risks that are associated with natural disasters, which is the common tendency in fiscal planning and budgeting, but also recognises that systemic risks can arise from the actions of humans and engineered systems. When these risks arrive simultaneously or act together, they place new sets of pressures on social systems.
A good example is the 2011 tsunami in Japan. It was quickly followed by the Fukushima nuclear disaster. The catastrophic effects of the tsunami and nuclear disaster cost the Japanese economy over $300 billion dollars, setting it back even further.
Four key principles govern long-term fiscal planning: 1) solvency, when the government is able to meet its financial obligations, 2) growth, where there is enough savings and flexibility for the government to ensure sustained growth, 3) stability, where future obligations can be met with current tax burdens and finally, 4) fairness, where current obligations are not met in a way that shifts costs to future generations.
This latter principle is absolutely crucial for South Africa as a large proportion of our population still carries the burden of the long-term effects of historic apartheid policies. Going forward, poor planning and ill preparedness will set us back further as well as continue the impoverishment of the most vulnerable members of our society.
Thus, LTFP is important because it emphasizes being better prepared for the future. It is about planning in a complex and fast moving world where governments behave in a responsible and responsive manner.
For now, South Africa is reliant on a demand and supply approach where budgets are supplied through the Medium Term Expenditure Framework (MTEF). The MTEF was introduced a decade ago and is a vast improvement on the old apartheid system of budgeting and fiscal planning. However, the MTEF’s limitation is that it restricts budgeting to a three-year cycle.
Long-term fiscal plans require more visionary thinking and are designed to help us decided whether current choices will be good for the future. Put another way: how do we invest in something that is not immediately in sight and for which there is no pressing demand, yet it is an investment, which could circumvent a future burden of cost on our society?
The National Planning Commission (NPC) has been set up to do precisely this, but the National Development Plan (NDP) doesn’t quite get there.
For instance, if one considers the first draft of the NDP, it reads as part commentary on South Africa’s social and economic ills and part plan. Mostly, what it calls plans are really backlogs in infrastructure investments that were delayed for some ten years or so. There is nothing new in its proposals.
Some of the NPC’s proposals are superfluous, as infrastructure plans are already being spearheaded by the Presidential Infrastructure Co-ordinating Commission, raising questions about what exactly the role of the NPC is.
But the NPC’s work can be strengthened if it starts developing reasonable future scenarios that may likely occur such that different trade-offs can be assessed and choices made at a distance from the lobbying of special interest groups.
LTFP can act as a filter such that short-term spend from the fiscus does not create the mirage of prosperity when our social welfare is actually being eroded in the long-term.
For instance, if our government exploits mineral wealth too quickly and imposes sub-optimal resource rents, it reduces the overall store of wealth and ability to finance future areas of the economy outside of mining, which may come at a higher cost.
Moreover, LTFP is of material concern to the debate on whether or not to build a new oil refinery in South Africa. Building a new 400 000 barrel/day refinery may appear to be the right decision to meet the growing fuel needs of our country now. However, in 10-15 years, it could be the most un-strategic investment.
Oil refineries require a lot of upfront capital and once built, we could be stuck with a problem for 40-50 years. The maintenance and other costs keep running and act as a drain on public resources -- in addition to diverting resources away from social investments. This is precisely the problem South Africa is facing today with the soccer stadiums that were built for the 2010 World Cup.
Let’s look at the oil refinery case more carefully to understand what dangers may lie ahead.
Firstly, we have to think about whether we want to be so dependent on oil given that higher oil prices mean increased petrol prices and higher food costs.
Secondly, how does this new refining capacity compare with others being built around the world? Angola is already building a refinery that will meet the demands of neighbouring countries. This throws doubt on whether such large refining capacity is needed here in South Africa.
Thirdly, is the building of a new refinery a real need or a false demand created by special interests that want to milk public spending for their own benefit? An investment that is unnecessary will undoubtedly shift the burden of costs to future generations.
We are still in the phase of infancy when it comes to planning, but public sector involvement in the economy (often exceeding 50% of GDP) is by far greater than that of the private sector, which makes the role of government in fiscal planning for the future vital for the ongoing health and sustainable growth of our economy.
In general, every demand for public goods and services need not be satisfied, but investment choices of today could be looked upon in the future as being imprudent and imposing dire consequences for society if they are not carefully thought through.
The NPC’s future is still uncertain politically. Whether the NPC will continue in its current format is still to be seen. Nonetheless, where the NPC will leave, the National Treasury is looking to entrench a process that will become a permanent feature of government’s budgeting and fiscal planning process.