After the Bell: The difference between a fiscal framework and a fiscal rule

It’s been a tense few days in SA’s latest iteration of our democratic dispensation and the dust hasn’t exactly settled yet. But behind all of the political machinations, which frankly I find unnecessarily confusing, I think there are two important notions: the fiscal framework and a fiscal rule. Allow me to argue that this crucial difference illustrates why the process has produced a result which is contrary to the best interest of South Africans. 

The simple distinction is this: The fiscal framework is the recipe and fiscal rules are the diet plan. 

The fiscal framework is the outline that shows how the government intends raising money and how it intends spending it. It’s essentially a blueprint, and typically contains revenue projections, expenditure estimates, borrowing needs and what that all means in terms of the deficit. 

In SA, and many other places, the national Budget process requires Parliament to approve the fiscal framework first before a detailed Budget can be finalised and passed.   

The fiscal framework has never been a big issue in the past because since the ANC had an absolute majority, there was never any doubt that it would be passed. 

But this year, all of that detonated into a morass of political arguments hinged around the 2 percentage point VAT increase. Clearly, the ANC was running according to history and assumed everything would go off as normal. But the tax increase was so large that all opposition parties inside and outside the Government of National Unity (GNU) objected. 



How the ANC read the room so badly wrong is astonishing and speaks to its retained assumptiveness about its position in SA politics. But it’s arguable that the DA also overplayed its hand. The negotiations between the ANC and the DA are not (yet) widely known, but it seems like the DA judged this was the moment to press its advantage and there have been some reports that it put things like the National Health Insurance scheme, the Expropriation Bill and even Starlink on the table. 

The ANC has now apparently sneaked behind the GNU parties in a classic end run, cutting a deal with Herman Mashaba’s ActionSA to get the votes it needs to pass the Budget. With ActionSA, Inkatha and one of the smaller parties, the ANC has the votes and a Budget will be passed.

In American football, an “end run” is when the player carrying the ball runs around the end of the line of scrimmage, rather than pushing through the middle. The idea is to avoid the dense centre defence and sneak around the edge where there’s (hopefully) less resistance. It’s fast and cunning, and that is exactly what the ANC has done here. 

But there are two problems. The first is that Mashaba refused to join the GNU on the basis that it would be a proud opposition party, so this deal is a big backtrack on that undertaking. The fact that ActionSA was not part of the GNU was essentially its unique selling point, which it has now sacrificed in order to settle, among other things, some outstanding gripes with the DA. 

Importantly, the deal struck between ActionSA and the ANC means that there would be no VAT increase at all, and no bracket creep increase in personal taxes either. Amazing. The ANC, which wanted a 2 percentage point VAT increase, now suddenly accepts nothing. But the second problem is that the fiscal framework passed in Parliament yesterday still includes a small increase in VAT, with a recommendation that Treasury looks at ways to achieve a zero VAT increase. 

Apparently, this is possible because a 0.5 percentage point increase in VAT would only result in a R20-billion or so increase in government income. The government was due to pay the National Empowerment Fund (NEF) - one of literally dozens of ANC government boondoggles that don’t function any more - R20-billion. But the NEF only spent R4-billion last year, so Treasury can reduce that and wiggle this and that to save the rest. Huzzah! Job done. Funny they didn’t just think of that themselves in the first place.

This puts the DA in a pretty pickle. In a sense, the negotiations have satisfied the DA in at least some of the direction it wanted to go. But by getting ActionSA onside, the ANC has demonstrated that it has an alternative if the DA gets too cocky. And, incidentally, it has demonstrated it might be able to hold the government together without the DA. 

So, the DA now has to decide whether it intends to stay in the GNU, about which we will presumably hear much more in due course. In the meantime, both the DA and the EFF have challenged the passing of the fiscal framework, saying it is contrary to the rule of Parliament.

The overall result of the Budget machinations is that SA has a Budget, but might not have a GNU. Or, it might have a Budget and a new GNU. 

But what about the fiscal rule? A fiscal rule is simply an undertaking that the government will, over the long term, remain within certain parameters. Typically, these parameters could be levels of public debt, say as a percentage of GDP. It could specify the size of the deficit (expenditure minus income); a safe figure is often less than 3% of GDP. It could specify spending limits, suggesting that spending can’t increase more than inflation plus 1%. It could also constitute a revenue rule, specifying extra revenue has to go into a rainy-day fund. 

It’s unclear what, if any, of these criteria the DA demanded of the ANC, but I would be very surprised if they specified none. And, if that is the case, the ANC have avoided these rules with its end run. 

If this all played out the way I think it did, this is a problem from the perspective of SA voters. First, instead of trying to deal with the Budget problems in depth and with integrity, the ANC has avoided that discipline with its backdoor deal with ActionSA. That’s almost the definition of short-termism. 

Second, the whole process has ruined what was developing into a nice stable and sensible relationship between SA’s two largest centrist parties. If the DA leaves the GNU, it seems possible that the ANC could continue in government without facing a vote of no confidence, leaving it in the maw of one of the tiny parties that could bring the government crashing down because of some small slight. It’s exactly this problem that has made the City of Johannesburg, just to take one example, such a disaster area. The result will be a government that’s intrinsically more fragile.

And, third, the ANC missed the opportunity to really think hard about what it wants SA’s long-term fiscal position to be and then how to get there. Fiscal rules can be rigid, but they promote discipline and long-term planning; they build investor and public trust; and they help manage debt. Which of these does SA not need at the moment? The currency and bond markets all fell today because they are fearful of exactly these problems.

 And, frankly, rightly so. DM