National Treasury’s decision that could cost South Africa dearly

The National Treasury’s newest inflation planning baselines for government departments may create built-in real spending increases.

The Bureau for Economic Research’s Roy Havemann recently explained that this creates a risk for fiscal slippage, something South Africa’s struggling financial health can scarcely afford.

Havemann’s comments follow the National Treasury’s release of its inflation guidelines for departments.

These guidelines are anchored around a 4.5% target, with an assumption of 4.14% in 2026/27, 4.36% in 2027/28, and 4.49% in 2028/29. 

“This indicates that the Treasury is working around an MTBPS inflation forecast of 4.5%, not 3%,” Havemann noted.

These guidelines come as the Treasury and the Reserve Bank consider lowering and narrowing South Africa’s inflation target to 3% from its current range of 3% to 6%.

The Reserve Bank believes this target change could bring immense benefits for South Africa, including faster economic growth, lower debt-servicing costs and easing cost-of-living pressures.

While the decision to change this target is not yet final, an announcement is expected within the coming months.

Until then, Havemann explained that the National Treasury needs to reflect unbiased and policy-neutral outcomes.

Therefore, the potential target change could not be included in the Treasury’s guidelines until it is officially announced. 

“That said, there is a risk of fiscal slippage using the current guidelines,” he warned. This is because the Treasury’s inflation planning baselines are above market consensus, which may create built-in real spending increases.

In other words, as the government bases its spending on a higher inflation rate, this could lead departments to plan for more spending in real terms, thereby increasing the risk of overspending.

This is something the country’s Budget cannot afford, as the Treasury is already under immense pressure to increase revenue and rein in spending to run a primary budget surplus.

Achieving this surplus is crucial to the Treasury’s plan to stabilise South Africa’s immense debt burden, which currently sees the government spend around R1.2 billion a day to service.

The graphs below, courtesy of the National Treasury, illustrate the growth of the government’s debt burden and the cost of servicing that debt, as well as the Treasury’s forecast for debt stabilisation.

Treasury estimates backfire

For the past decade and a half, the National Treasury has consistently overestimated South Africa’s economic growth, expecting faster growth from an economy that has been stagnating.

Over the past decade, the Treasury has projected an average annual growth rate for the local economy of 1.57%, whereas the actual growth rate has been 0.8%.

While this gap appears relatively small, it has significant implications for South Africa’s Budget, as the forecasts impact nearly every financial metric.

Overestimations in the forecast mean the financial outcome at the end of the fiscal year will be worse than anticipated, impacting the National Treasury’s credibility and the country’s financial health.

For example, the Treasury’s forecasted GDP growth rate informs its calculation of the country’s debt-to-GDP ratio, which has ballooned over the past decade. 

With GDP growth overestimated, the debt-to-GDP ratio at the end of the year is typically worse than initially forecasted. 

This, in turn, impacts estimates of when the country’s debt burden will stabilise. Currently, the Treasury expects South Africa’s debt to stabilise at 77.4% in the 2025/26 fiscal year.

With this metric, the worse-than-expected outcome is also impacted by increased spending pressures throughout the fiscal year, which results in an increased debt burden.

Crucially, the Treasury’s economic growth forecast is also used to calculate the government’s expected tax revenue for the year.

This expected revenue is then used to determine the government’s spending for the fiscal year, with the Treasury explicitly aiming to keep expenditure below tax revenue to run a primary budget surplus.

The graph below shows the difference between the National Treasury’s growth forecasts for each financial year over the past 15 years and the reported GDP from Statistics South Africa at the end of the year.