Fiscal Renaissance in a Democratic South Africa

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 populist spending pressures. Constitutionally based, 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 have 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 macroeconomy and reduced uncertainty, reflected internationally in narrowed sovereign risk spreads and improved debt ratings. However, microservice delivery in social expenditure has been disappointing (in some cases owing to capacity constraints rather than inadequate fiscal allocations), and a 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 macroeconomic stability. Copyright 2007 The author 2007. Published by Oxford University Press on behalf of the Centre for the Study of African Economies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.