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This resource is hosted by the Nelson Mandela Centre of Memory, but was compiled and authored by Padraig O’Malley. It is the product of almost two decades of research and includes analyses, chronologies, historical documents, and interviews from the apartheid and post-apartheid eras.

3 Fiscal Policy

3.1 Recent fiscal trends

In response to the unsustainable fiscal situation that had developed by 1992/93, when the overall deficit reached 7,9 percent of GDP, fiscal policy has been informed by the following goals:

     to cut the overall budget deficit and the level of government dissaving;

     to avoid permanent increases in the overall tax burden;

     to reduce consumption expenditure by general government relative to GDP; and

     to strengthen the general government contribution to gross domestic fixed investment.

Although government dissaving has not yet been eliminated, progress has been made in this respect. The cash-flow adjusted exchequer deficit was reduced to an estimated 5,4 percent in 1995/96. Consolidated general government tax revenue has increased from 25,6 percent to 26,8 percent of GDP between 1992/93 and 1994/95, but still somewhat below the 1989/90 level of 27,1 percent. At the same time, significant shifts in the allocation of expenditure have been effected in accordance with reconstruction and development priorities.

3.2 A tighter fiscal stance 

To increase domestic savings and benefit from the expansionary impact of the stronger investment and export performance which is envisaged in this strategy, a tighter fiscal policy is necessary. In this way, inflationary pressures will be kept in check and domestic resources will be released for financing capital formation. A lowering of the fiscal deficit target from 4,5 percent of GDP to 4,0 percent in the 1997/98 fiscal year is therefore proposed. Two further reductions of 0,5 percent of GDP in each of the subsequent years would bring the deficit to a satisfactory long term target of 3,0 percent of GDP in fiscal 1999/00. This, together with the envisaged strengthening of government investment spending, would eliminate government dissaving, currently at 2,5 percent of GDP.

In order to achieve the new fiscal targets in the 1997/98 budget, the Minister of Finance has initiated a thorough audit of government expenditure, including RDP allocations, to identify those areas in which budgetary cuts can be made without detracting from the priorities and commitments of the Government.

3.3 Public service restructuring

The process of administrative restructuring of the public service provided for in the Constitution gathered pace in 1995. With the first phase of the process involving the integration of the public service at national and provincial levels nearing completion, attention is shifting to the longer-term issue of creating a more cost-effective service.

A major step was taken in early 1996 with the devolution to line departments of all career related personnel functions. The restructured Public Service Commission will retain a research and monitoring role, while the Department of Public Service and Administration will be responsible for broad human resource policy, conditions of service and labour relations.

Careful management of the overall government wage bill is central to the fiscal strategy. In implementing the three-year public service salary adjustment and right-sizing programme, affordability considerations, maintenance of public services and macroeconomic consistency are paramount. Agreement has been reached on the principles of broad-banding and occupational classification.

In order to effect a right-sizing of certain parts of the public service, a voluntary severance package has been introduced. This will be implemented with considerable circumspection in order to limit both the resulting loss of skilled personnel and associated costs to the fiscus.

Successful implementation of the agreement would lead to a real increase in the government wage bill of approximately 2 percent per annum over the next five years. This, together with strict containment of spending on other goods and services and current transfers, implies a roughly constant level of real recurrent government expenditure and a reduction of 3 percentage points in this aggregate relative to GDP by the year 2000. This would allow an increase in discretionary RDP-related spending on projects of a capital nature of about 8 percent per year, compared with little more than 2 percent per year in real terms in the absence of accelerated growth. This represents substantial room for manoeuvre in the developmental dimensions of the budget.

3.4 Budgetary reform

The budget is the primary vehicle through which access to social services is assured. Nearly half of all government spending is devoted to education, health, welfare, housing and related services. Strengthening of the redistributive thrust of these expenditures remains a fundamental objective of economic policy. Reprioritisation within the health and education budgets, a municipal infrastructure programme, restructuring of the welfare system, land reform and a review of training and small business support policies are amongst the initiatives which aim to address the claims of the poor to a fair package of basic needs. These adjustments are being accompanied by the elimination or scaling down of activities which cannot be provided to all or which could be undertaken effectively by the private sector.

Government recognises the importance of a longer-term fiscal planning framework alongside the annual budgetary process. A multi-year fiscal model has recently been developed which will be updated annually to provide greater clarity regarding public expenditure trends and priorities. It is envisaged that a draft medium-term expenditure model will be available to assist in the preparation of the next budget.

Several budgetary reforms are presently under consideration, including the earlier presentation of budgets to Parliament, the possibility of a switch to an accrual accounting system, a revised basis for reporting assets and liabilities, a restructuring of the accountability of the various departments and a transformation of the structure of inter-governmental financial relations.

3.5 Revenue issues

International experience confirms that it is on the expenditure side that the fiscus is most effectively able to contribute to redistribution. It is nonetheless important that the incidence of taxation should remain progressive, while at the same time impacting across a broad base so as to avoid excessive rates. Several further steps in the overhaul of the tax structure including the rewriting of the Income Tax Act will be undertaken. A new dispensation for the taxation of retirement funds, higher rates of excise on tobacco products and improved tax collection will lead to increased revenue on the current income base. This will be partially offset by adjustments to the personal income tax structure with a view to correcting for fiscal drag and reducing the distorting impact of excessive rates of tax.

Recognising the importance of effective tax administration, the new SA Revenue Service has embarked on the upgrading of its revenue and customs and excise offices, including personnel training and modernisation of information systems. This will, in due course, contribute to improved collections and greater fairness of the tax system.

The improvement in economic growth, together with improved tax administration, should lead to a strong increase in tax revenue relative to GDP. This will create considerable scope to effect further reductions in the rates of personal and corporate taxation, while maintaining a ratio of tax to GDP of about 25 percent.

In addition, the Department of Finance is reviewing the existing arrangements for the financing of government debt and the management of outstanding debt. The outcome of this process will be the establishment of a fully-fledged Debt Management Office leading to savings on the interest bill in the medium-term. A first step has been taken in this regard with the review of cash management within the public sector.

This resource is hosted by the Nelson Mandela Centre of Memory, but was compiled and authored by Padraig O’Malley. Return to the Nelson Mandela Centre of Memory site.