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Finance minister Enoch Godongwana. File photo: BRENTON GEACH/GALLO IMAGES
Finance minister Enoch Godongwana. File photo: BRENTON GEACH/GALLO IMAGES

In the aftermath of budget 2024, pointing out that there were electioneering elements in the finance minister’s presentation would be akin to flogging a dead horse. However, there are still a couple of points to be made on possible over-optimism.  

Despite possible electioneering elements, credit must be given to some positive developments, such as the intention to forge ahead with fiscal rules for SA. At least on the surface, the macro-fiscal position shows an improvement, with Treasury estimations showing the debt-to-GDP ratio stabilising in 2025/26, though this is based on temporary measures.  

However, there are once again questions over the credibility of the budget. For example, ratings agency Fitch pointed out that the Treasury’s projections on revenue growth appear optimistic, and state-owned enterprises will likely require additional support over the medium term. Both elements pose a risk to the notion of debt stabilising by 2025/26.  

Another significant risk to achieving debt stabilisation by 2025/26 is what recent research by the IMF refers to as “perils of over-optimism”. According to this research, fiscal slippage — deviations from planned expenditure, planned budget balances and expected debt levels — is often driven by over-optimistic growth and fiscal projections.

Fiscal slippage due to projections that are deemed over-optimistic in retrospect is frequently caused by unforeseen events such as a pandemic. However, there are also cases of systemic optimism bias, in which case the research shows greater bias in official government projections than in private and external projections.  

That brings us to the budget’s GDP growth projections, which as referenced in the 2024 Budget Review seem to be based on the IMF’s World Economic Outlook of October 2023. This results in growth projections of 1.3% in 2024, 1.6% in 2025 and 1.8% in 2026.  

However, the IMF has updated its growth projections for SA in its most recent World Economic Outlook Update, published in January, with growth projection revised downwards from 1.3% to 1% in 2024, and from 1.6% to 1.3% in 2025.  

As such, the growth projections upon which debt stabilisation is currently based are different from the growth projections of the IMF. Furthermore, the Treasury’s growth projections are more optimistic than the SA Reserve Bank’s growth projections in its monetary policy committee statement of January.  

Perhaps some may consider this difference between growth rates minuscule, but when growth hovers around 1%, then 0.3 percentage point makes a big difference and poses a risk to the macro-fiscal position in more than one way.  

It would directly affect debt-to-GDP ratios given that GDP is the denominator in the equation. It would adversely affect revenue, which further affects budget balances in the absence of additional expenditure reductions. And, it would likely lead to additional accumulation of debt, and as such additional debt servicing costs.  

If the Treasury’s projection turns out to be over-optimistic, it will once again cause debt stabilisation to be pushed out in time and up in terms of stabilisation levels. Overall, credibility will suffer. 

In an environment with many uncertainties and many moving parts, it is not easy to guard against projection errors. However, the IMF’s research on the “perils of over-optimism” suggests that fiscal slippage and systemic over-optimism are less prevalent in countries with fiscal rules, where there are independent bodies to guard against over-optimistic projections.  

The perils of fiscal over-optimism and possible guardrails should form part of the design and institutional arrangements for fiscal rules in SA. This will not necessarily mean there would not be fiscal slippage from time to time, or that there would not be projection errors. But it could act as an additional layer of checks and balances and improve the country’s fiscal credibility. 

• Botha, an independent analyst focused on public finance and fiscal policy who is reading for a master’s degree at the London School of Economics & Political Science, was a strategic analyst in the Western Cape department of finance & economic opportunities. 

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