By Ebrahim-Khalil Hassen · 25 Feb 2011
Debates on the national budget have been called “noisy.”
Budget 2011 has been particularly noisy, as the sheer number of voices responding to the budget has increased, as has the complexity of the arguments being made.
This is a healthy development as it strengthens democracy, and ensures that government becomes accountable and society focuses not only on criticisms, but also alternatives.
The central challenge for government is not only to detect the signal through this noise, but to amplify the signal by taking on board as many players as possible. Government to date has not managed to do this with the furore around the youth subsidy, a case in point.
Continued disagreements on fiscal policy and more broadly macroeconomic policy are usually stated as ideological ones. Whilst ideological factors obviously shape debate, listen a little closer and a call for participation in decision-making is discernable.
In tabling a document called “Fiscal Guidelines for South Africa”, seemingly the National Treasury is finally listening to this call for participation. The guidelines attempt to provide a more transparent and inclusive process for developing the fiscal framework, i.e. the way government will raise and spend money.
The guidelines – which are tabled for discussion – attempt to meet demands for fiscal stability and to create fiscal space. Where fiscal stability means that government finances should be managed in a way that is predictable, can fund government programme’s and does not place an excessive burden on future generations. And fiscal space means budgeting in a manner that allows South Africa to spend on social and economic programmes in times of economic growth, but also in a recession.
The way that the guidelines attempt to meet this is by establishing three key principles.
First, the budget balance should be set to counteract the upswings and downswings in the economy, referred to as counter-cyclical fiscal policy.
Second, the level of spending should be set to ensure that public debt and interest costs do not rise indefinitely over the long run, thus ensuring that long-term debt is sustainable.
Third, the long-term costs of spending programmes should be analysed and considered when setting the budget to ensure inter-generational equity.
The intent is important, as it takes on board two traditionally competing ideas. On the one hand, the concept of a counter cyclical fiscal strategy has support amongst Keynesian economist, but it also has support among more radical economists, such as the proposal from Cosatu for a counter cyclical strategy.
On the other hand, there are dangers and potential benefits in increasing the deficit. The danger is that long-term debt becomes unsustainable. The potential is that increased public spending kick-starts the economy. The guidelines attempt to manage the dangers, but seemingly recognise the potential of deficit spending.
National Treasury is attempting to reconcile competing demands on fiscal policy in a manner that positions South Africa more consciously to tackle the huge challenges of unemployment and inequality. Some might argue that it is attempting the impossible.
However, in translating the principles into proposals, the National Treasury proposes that an annual target for the structural budget balance consistent with long-term growth, the desired level of public debt and inter-generational considerations, be adopted. Furthermore, that the costs of existing and new programmes be made explicit, especially if they require long-term expenditure. In the event of a large fiscal shock, it proposes a timetable to bring the budget back on target.
Potentially the proposals could shift engagements on fiscal policy significantly for two major reasons.
First, it provides greater scope to affect the budget. The National Treasury has, since the advent of democracy thrived on creating a space that is insulated from some and permeable to others. It has built a formidable reputation for insulating itself from the pressures of the so-called “fiscal barbarians” also referred to as populist economists.
It has, however, been permeable to larger companies in the South African economy, with the Growth, Employment and Redistribution (GEAR) strategy providing clear evidence that big business has had significant influence on public policy.
Under the stewardship of Minister Trevor Manuel, social spending did indeed receive significant increases from the year 2000, until the impact of the global economic crisis slowed down government’s spending. This increased social spending was attributed to the fiscal space facilitated by GEAR. Big business and a largely supportive media hailed the fiscal performance of South Africa. It was thus a rude awakening when the impact of the recession revealed the central weakness of the strategy – its inability to withstand significant negative shocks.
But significant opposition to GEAR undoubtedly also played a role in influencing the new direction that government is now taking. In hindsight, the opposition to GEAR was not only significant, but more importantly, foundational. GEAR became a signpost of the time, offering a way for calls for redistribution to coalesce around opposition to the macroeconomic strategy, and for the development of alternatives.
The alternatives initiated in civil society find expression in official government policy today.
Second, parliament may just have played an important role in requesting that fiscal guidelines be established.
Increased powers provided to Parliament in the Money Bills Amendment Act are being exercised. It was in response to this that the National Treasury tabled the “Fiscal Guidelines for South Africa” document.
Importantly, the fiscal guidelines document argues for a link between fiscal policy and trade and industrial policy. It commits government to setting budget targets in the context of the New Growth Path’s commitments to lower interest rates and a more competitive rand.
In Budget 2011, the National Treasury emphasizes that protecting the fiscal gains for future generations will require a framework based on the long-run levels of expenditure and revenue that the economy can afford.
Moreover, the process of setting fiscal policy becomes much more transparent and contestable, as it involves parliament and the Finance and Fiscal Commission. In so doing it opens space for all actors in South Africa to impact upon the framework that guides allocation and taxation decisions in South Africa.
This is potentially groundbreaking stuff, as it recognises the sensible call for a more open process of setting budgets, as well as putting in place a process to align fiscal, industrial and monetary policy.
The fiscal guidelines document represents a culmination of pressure for an open national debate on fiscal policy, with a mechanism to resolve some disagreements, but more importantly make transparent the balance of forces that shape the budget.
The underlying message is that the National Treasury has recognised that as a public institution it can no longer provide privileged access to some, while excluding others.
Ultimately, the decision for civil society and other stakeholders to engage rests on a determination of the best way to translate ideas for redistribution and economic inclusion into government’s policy.
Minister Pravin Gordhan has thus played a brave hand. With the “Fiscal Guidelines” he has created the conditions for a more transparent and accountable process of determining the fiscal framework. But Treasury will need to do something akin to a door-to-door campaign to convince society of the value of this new approach.
**Note: Ebrahim-Khalil Hassen is the editor of Zapreneur, which has a special issue on Budget 2011.