Fiscal renaissance in a democratic South Africa

South Africa has overcome adverse initial conditions to achieve a remarkable fiscaltransformation 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 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 controlprovincial 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 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.