Fiscal Renaissance in a Democratic South Africa

Tania Ajam and Janine Aron ()

No 2007-10, CSAE Working Paper Series from Centre for the Study of African Economies, University of Oxford

Abstract: South Africa has overcome adverse initial conditions to achieve a remarkable fiscal transformation since the 1994 democratic elections, held amid uncertainty about its ability to maintain the rule of law and resist the populist spending pressures. Constitutionally-bases, durable and credible fiscal reforms have contained spending and rendered policy at all levels of government more transparent and accountable, and more predictable through multi-year budgeting. Extensive tax reform and more efficient tax collection has expanded revenue, permitting lower tax rates for both individuals and companies, and personal tax relief. Fiscal consolidation almost eliminated the budget deficit by 2005, and with improved debt management, has created a lower and more sustainable debt burden. While highly centralised revenue raising powers and greater decentralisation of expenditure to sub-national governments created a vertical fiscal imbalance, a strict no-bail out approach helped control provincial spending. The fiscal-monetary policy mix has stabilised the macro-economy and reduced uncertainty, reflected internationally in narrowed sovereign risk spreads and improved debt ratings. However, micro-service delivery in social expenditure has been disappointing (in some cases due to capacity constraints rather than inadequate fiscal allocations). And long-term decline in infrastructure investment and capital stock is only belatedly receiving attention. The challenge is to increase social and infrastructure expenditure at a sustainable rate and to improve the quality of service delivery, to avoid undermining the gains in microeconomic stability.

Date: 2007
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