A well-designed fiscal anchor could be the key to stability, but only if we truly understand what it is.
(A shorter version of this economic note was published in Currency on 12 February 2025, before the budget was postponed.)
The finance minister will deliver his fourth budget speech today. During his medium-term budget policy statement (MTBPS) in October last year, he described the National Treasury’s financial strategy as aiming “to achieve the fiscal sustainability needed to support inclusive economic growth”.
Sustainability has been a recurring theme in South Africa’s fiscal strategy for nearly 15 years. Unfortunately, we have little to show for it. Between 2012 and 2024, South Africa’s debt-to-GDP ratio increased from 41% to 74%. As a result, the share of the budget allocated to servicing debt nearly doubled.
While the share for health, education, and social protection remained largely intact, allocations for defence, police, courts, prisons, and housing were significantly reduced to accommodate rising interest payments. Based on the MTBPS, 22.4 cents of every rand will be allocated to servicing debt in 2024/25 – a highly regressive spending item.
With each year we delay stabilising debt, interest payments consume a larger share of the budget, increasing the budget balance needed to stabilise debt. Despite this urgency, present conditions aren’t making it easy.
A 2023 International Monetary Fund (IMF) research paper1 identified six factors that increase the probability of successful fiscal consolidation. For South Africa, these factors highlight significant challenges:
- Strong domestic economic growth: Although there are some optimistic growth forecasts for South Africa, these forecasts are generally contingent on substantial progress in solving very complex structural constraints.
- Strong global demand: The IMF projects modest 3.3% global growth in 2025 and 2026, from an estimated 3.2% last year and below the historical rate of 3.7%. Trade wars and geopolitical fractures, however, pose risks.
- Low interest rates: Though rates are declining, they remain elevated by pre-pandemic standards, with global risks limiting room to cut.
- Export growth: Between 2012 and 2023, exports grew by an average of only 1.5% annually – a stark contrast to pre-2008 performance2.
- Strong track record of fiscal management: Chronic overestimates of growth and revenue and underestimates of debt accumulation have eroded trust in budget promises.
- Broad-based political support: Fragmented politics and instability undermine the government’s commitment to long-term reforms. While conditions may fluctuate daily, the current climate signals potential challenges ahead.
Despite the urgency of flattening South Africa’s debt curve, the odds seem stacked against success. What do we do?
Firstly, and most obviously, we should continue driving reforms, especially those related to electricity, visas and logistics. We also need to better understand our poor export performance and reconnect our domestic economy to global markets. The World Bank’s Unlocking South Africa’s Potential report provides key insights on achieving this3. Another World Bank report also suggests strengthening and broadening market competition and making institutions more efficient and supportive4.
Secondly, the consolidation plan should be well-designed. The IMF paper shares some insight: consolidation should be “gradual and back-loaded” while protecting “public investment, including in physical and human capital, and targeted social spending “. Plans that begin slowly and accelerate over time while protecting strategic spending tend to “stabilise debt more permanently with more contained output losses” while mitigating the negative impact that consolidation can have on income distribution.
However, a gradual, back-loaded approach demands trust, especially in the face of the present headwinds. Ideally, capital markets would nearly respond to commitments to future surpluses as they would respond to the achievement of current ones. Without that trust, when fiscal consolidation is gradual and back-loaded, bond yields will remain high, slowing consolidation even further and complicating the process.
This is why a fiscal anchor is so critical. When it is well-designed, a fiscal anchor (or rule or standard) gives fiscal policy the space to be measured and patient5. Unfortunately, there is a common unfounded concern regarding the apparent inflexibility of fiscal anchors.
If a fiscal anchor were completely inflexible (could not be lifted), it would undoubtedly be a problem for fiscal policy and a risk to economic stability. As the Covid pandemic in 2020 and the Global Financial Crisis in 2008-09 showed, fiscal policy must retain the flexibility to respond to crises. As the Bureau of Economic Research’s recent note on fiscal anchors states6: “rules [fiscal anchors] should allow for countercyclical changes to taxes and expenditure” and should not “increase economic volatility.”
So, if the anchor can be lifted, what is its point?
Among other things, it shields the budget from shifting whims – political or otherwise. Therefore, it increases trust and credibility and provides the space for a consolidation plan that minimises short-term downside and increases the likelihood of sustained success.
Around the anchor, protocols, procedures, and institutions are adjusted or created to ensure policy can respond effectively to maintain macroeconomic stability or address crises. Decisions can then be based on sound technical analysis and advice – reviewed, scrutinised, and debated within the framework of these standards and institutions – rather than political pressure.
Therefore, the design of an anchor is less about a specific number or target and more about the institutions and procedures that govern and legitimise decisions on when it can and should be adjusted or temporarily lifted. It isn’t a rigid mechanism that prevents responses to economic downturns or shocks.
While a fiscal anchor is not a silver bullet, it is a powerful tool when well-designed. Dismissing its potential due to misunderstandings of its purpose would be a costly mistake. With a clearer understanding of what a fiscal anchor truly is, South Africa can build the broad support necessary to return to a financially sustainable path.
1 International Monetary Fund. 2024. Fiscal Consolidation: Taking Stock of Success Factors, Impact, and Design (https://www.imf.org/en/Publications/WP/Issues/2023/03/17/Fiscal-Consolidation-Taking-Stock-of-Success-Factors-Impact-and-Design-530647)
2 see Edwards, 2024, Trade and Industrial Policy for South Africa’s Future (https://doi.org/10.71587/r6jyr829)
3 World Bank. 2024. Unlocking South Africa’s Potential: Leveraging Trade for Inclusive Growth and Resilience (https://documents.worldbank.org/en/publication/documents-reports/documentdetail/099072324033025851)
4 See World Bank. 2025. Driving inclusive growth in South Africa.
5 For background on the charaterics of a well-designed fiscal anchor, see Bureau of Economic Research. 2025. A fiscal anchor for South Africa (https://www.ber.ac.za/Documents/Index/Impumelelo-Economic-Growth-Lab)
6 Bureau of Economic Research. 2025. A fiscal anchor for South Africa (https://www.ber.ac.za/Documents/Index/Impumelelo-Economic-Growth-Lab)
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