There is no reason not to like fiscal rules

(This is an expert from an article written by Dr Roy Havemann, Claire Bisseker and Robert Botha and first appeared in Business Day on 14 February 2025.?You can read the full article here.)

Fiscal rules are there to promote discipline, ensure that debt can be paid, and enhance a government’s credibility. But will a fiscal rule help improve South Africa’s fiscal position and, in turn, reduce borrowing costs?

In a recent research note, the Bureau of Economic Research (BER) reviewed the international evidence on fiscal rules. The experience in the 105 countries that have adopted them suggests that strong, well-designed rules can signal a government’s commitment to fiscal prudence and are associated with better fiscal performance.

A well-designed fiscal rule could also lower interest rates. The interest rate that South Africa pays on its debt is directly related to whether or not lenders believe we will repay it. If they worry that we won’t honour our debts, the interest rate will rise and vice versa. This is important for the average South Africans given that the rate at which banks borrow is directly linked to government’s borrowing rate. If government interest rates fall, so will interest rates across the economy. Furthermore, interest payments are now the government’s biggest spending item, exceeding the budgets for education or health.

Bringing down interest costs will unlock money for other things. Of course, poorly designed or inadequately enforced fiscal rules can make the problems worse. A common criticism is that fiscal rules create “straitjackets” that overly limit government. Indeed, first generation fiscal rules, which were prevalent before the global financial crisis of 2007/2008, were often criticised for being too inflexible to allow treasuries to respond to adverse shocks.

Read the whole article here.

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