Newspapers like to report on spending plans for new hospitals, railway lines and school buildings, but the most enduring legacy of Pravin Gordhan’s 2011 budget may be something less tangible.
Parliament has asked the national treasury to develop a set of fiscal guidelines for South Africa that will secure the long-term sustainability of public finances against the kind of turmoil that has racked the governments of Europe in the past year.
The guidelines act as a kind of guard rail, preventing future governments from getting too deeply into debt and from exacerbating booms and busts through badly timed spending. The guidelines rely on three principles:
- Counter cyclicality — spending more relative to GDP when times are bad and less when times are good;
- Long-term debt sustainability — ensuring that spending levels don’t continually increase debt and interest costs; and
- Inter-generational equity — future generations should not be overburdened by the costs of spending enjoyed in the present.
The principles are not new; they are broadly outlined in the legislation that gives Parliament a say in money Bills, but the way they are now elaborated gives the legislature a rigorous framework for its oversight of spending and limits the risk of irrational exuberance.
The treasury is now proposing that these principles be captured in concrete measures. The first is an annual target for the structural budget balance — that is, the deficit or surplus adjusted for variations in the business cycle — consistent with long-term growth, debt levels and the impact on future generations.
The second is that the long-term costs of government programmes — including tax incentives — must be made explicit. The third is that a clear timeline for a return to baseline from big shocks like the 2009 recession must be set.
Plenty of people won’t like this approach, particularly those agitating for radical increases in state spending. That is exactly why they ought to be implemented, not to shackle policymakers, but to guide them, and to protect us against the kind of Greek or Irish future that we must avoid.