In the first of this two-part series a short overview was given of foreign constitutions that have enshrined fiscal rules, with specific emphasis on the Spanish constitution, and why SA should seriously consider amending the Constitution to enforce discipline within the fiscus.
It would be advisable that the following elements are covered by a constitutional amendment: balanced budgets across the board; capping debt; and implementing expenditure reviews.
Ensuring a balanced budget across the board
Instead of requiring that the budget be balanced every fiscal year, it would be better practice to require that a budget remain balanced over any given business cycle. That is, from the inception of a period of positive growth to the end of a recessionary period, government revenue must equal expenditure including debt servicing costs. In other words, a balanced main budget.
Following the example of the US state of Oregon, any surplus must be capped at, for example, 3% of GDP to prevent too much risk averseness creeping into the budgeting process with any excess surplus being returned to taxpayers in the form of a tax rebate.
Budget balancing requirements might differ between different spheres of government and there are also various options available to government regarding the mechanism through which to adjust the balance, such as the Swiss mechanism of adjusting expenditure through an appropriate cyclical factor. But, notwithstanding the devilish details, the overarching goal of a balanced-budget amendment must be to keep expenditure proportional to revenue.
This would effectively force the government to save up during the good times and use these savings to cover expenditure during tough times when revenues partially dry up and a natural deficit occurs. It would also serve to hinder the government’s tendencies to engage in active deficit spending as opposed to relying on automatic fiscal stabilisers.
The exact level at which debt must be capped relative to GDP is debatable, but the crux of the matter is simple: government must not be afforded near carte blanche when it comes to imposing what are effectively taxes on future generations.
But what is as important as capping the overall public debt level is controlling how any debt incurred is utilised.
The golden rule regarding debt is rather than incurring it for purposes of consumption spending, to incur it for purposes relating to capital expenditure where investment generates returns on the debt.
It is for this reason that all borrowed funds on the books of government, most notably debt related to the issuing of bonds, must be ring-fenced for capital expenditure and capital expenditure alone, and no debt to ever be incurred to fund government's debt servicing costs.
There is a reason the private sector is more efficient when it comes to balancing the books: it is subject to financial forces such as return-on-investment margins. It is time government subjects itself to the same.
The third prong of a constitutional amendment must focus on ensuring transparency and accountability when it comes to expenditure. The Constitution already enshrines these two concepts as principles of public administration in section 195(1)(f) and (g). A great mechanism for doing this is a constitutional provision that mandates expenditure reviews.
Expenditure reviews form the basis of zero-based budgeting, which entails government setting up budgets for the various departments and entities from scratch instead of basing budgets for a coming fiscal year based on previous years' budgets. The reason this works well is that it requires the justification of all expenditures.
It is, of course, impractical if not impossible to carry out expenditure reviews every single fiscal year, which is why it would probably be most practical to require all government entities to carry out such reviews every three fiscal years or perhaps even every five.
This is by no means an exhaustive analysis of constitutionalised fiscal rules, but it is crucial that the seed be planted now to move SA towards a path of permanent fiscal stability.
If these measures were implemented, government would enhance its image as a financially prudent entity that does not run the risk of defaulting on its debt or engaging in extensive quantitative easing that crowds out private investment. The risks of worse fiscal discipline are already a reality with ideas such as the nationalisation of the SA Reserve Bank for the presumed purpose of implementing a likely unconstitutional developmental mandate being punted.
I sincerely hope government takes heed of the calls emanating from the corners of sensibility and undertakes a drastic overhaul of the fiscal framework in SA, hopefully with its focus being on amending the Constitution to ensure that overzealous bureaucrats are prevented from abusing taxpayers' money to the detriment of citizens' livelihoods.
This article was first published on BusinessDay on 7 June 2021.
You can read Part 1 of this series here.