ROBERT BOTHA: Some advice for the incoming finance minister

Regardless of who the incoming finance minister will represent politically, whether it is the ANC, the DA or an independent candidate, there is now an opportunity to drive and support reform. That reform can be built on strong foundations that have already been laid, which would improve SA’s long-term fiscal sustainability and credibility. 

One of the starting points for reform is to revisit the IMF’s technical assistance report based on the IMF’s Fiscal Transparency Evaluation of SA, which was released earlier in 2024.

The report highlights various positive aspects, such as the fact that SA ranks second in the world in terms of budget transparency based on the findings of the Open Budget Survey. Furthermore, the country is rated “good” or “advanced” on almost 60% (21 out of 36) of the principles evaluated by the IMF.  

However, SA does not meet the standard on 16% of the principles. Notably — but not necessarily exhaustive — we do not meet the standards on fiscal policy objectives, independent evaluation in terms of fiscal forecasting and budgeting, long-term fiscal sustainability and investment projects.  

The point that SA does not meet the standards for fiscal policy objectives relates to the fact that the country does not have numerical or time-bound fiscal objectives. In practice this translates to setting vague sovereign debt stabilisation targets, changing the targets frequently, and then not meeting them. The recommendation from the IMF is to set clear fiscal rules that strike a balance between flexibility and credibility.

In terms of feasibility and likelihood of introducing fiscal rules or anchors, the National Treasury indicated in the 2024 main budget that it would start a consultation process to introduce statutory fiscal rules. Furthermore, the DA tabled two separate private member’s bills in an attempt to introduce fiscal rules for SA. As such, there is possibly bipartisan support for the concept. 

As for the independent evaluation of fiscal forecasting and budgeting, the main issue is that macro-fiscal forecasting presented in budget documentation is not compared with forecasts of other independent institutions and has a tendency to be over-optimistic. Though the parliamentary budget office could theoretically fulfil independent forecasts, its forecasts present an even greater level of over-optimism and inaccuracies than official forecasts. Furthermore, the Financial & Fiscal Commission does not evaluate the credibility of official forecasts or fiscal objectives. 

There is therefore a vacuum, and the institutional framework needs reform to ensure independent evaluation of fiscal forecasting and budgeting to guard against over-optimism. This is an area of reform that might go beyond the finance minister  and needs parliamentary backing. Moreover, it may require significant reforms of institutions such as the budget office and greater involvement of institutions such as the Reserve Bank and private institutions. 

Considering long-term fiscal sustainability, a specific pressure point is demographic growth. At the moment, SA’s intergovernmental fiscal governance adapts too slowly to change, and this is especially worrisome given that the provision of public services such as health and education often requires long-term investments to facilitate demographic and demand changes.

Though not mentioned in the IMF’s recommendations, the division of revenue formula, which distributes revenue among provinces, also needs reform. It is not forward-looking and does not adapt to a changing environment quickly and significantly enough. 

Furthermore, investment projects, and facilitating private investment into public infrastructure, are critical to catalyse economic growth. The report highlights deficiencies in terms of disclosing and appraising costs for multiyear capital projects spanning beyond the three-year medium-term expenditure framework, which hampers legislative oversight.  

In addition, there were 2,555 deviations and contract expansions in the 2022/23 financial year alone. Deviations amounted to R12bn, whereas expansions amounted to R162bn. Unfortunately, almost 50% of contract expansions were attributed to “poor planning” from Eskom.  

Another vital aspect of capital investment not covered in the IMF report is the overall capital expenditure performance of provincial governments and state-owned enterprises (SOEs). The general performance is poor. As an example, Transnet’s latest financial statements indicate that capital under-expenditure in 2023 amounted to 61% and 44% for Transnet National Ports Authority (TNPA) and Transnet Port Terminals (TPT), respectively.

This translates to R2.2bn of capital budget not invested in SA’s ports, though it was designated for this purpose. All of this is taking place while SA ports are performing extremely poorly by international standards.

As such, it will be important for the incoming finance minister to have a renewed focus on protecting capital budgets and improving capital investment performance across the public sector, including SOEs. The budget facility for infrastructure under the National Treasury has already improved capital investment in SA, though there is clearly room for further improvement.  

By increasing long-term performance disclosure and transparency, legislative oversight can be intensified and the finance minister can increase pressure and accountability to improve capital investment across the public sector.  

A more latent, but positive, element is that the IMF report was authorised by the SA authorities, presumably the National Treasury and former finance minister Enoch Godongwana. The report is also in response to authorities requesting technical assistance from the IMF. This signals an appetite for reform and momentum that can be maintained or accelerated under the government of national unity (GNU).  

Though there is still a lot of dust in the air, another positive element is that the first point under the basic minimum programme of priorities in the GNU’s statement of intent recognises fiscal sustainability as a priority. As such, there is an opportunity to drive positive reform in SA.

• Botha is Chevening scholar and master of public policy candidate at the London School of Economics & Political Science.