A golden thread of sound financial planning has run through the 20 national Budgets since the transition to democracy in April 1994.

Despite internal and external challenges, the country’s four finance ministers avoided the pitfalls of populism and created a fiscal foundation for sustainable economic growth. But, over the period, their efforts have been hampered – not least by opposition within the ruling ANC and its alliance partners. Present incumbent Pravin Gordhan, who took office in 2009, has also had to contend with the massive challenges created by the 2008/09 global recession.

The collapse of growth worldwide, the policies adopted globally to revive damaged economies and the reversal of these policies recently have destabilised emerging markets, including South Africa. A weak rand and tepid growth are creating new hazards for the country’s key economic policymakers.

The new dispensation got off to a good start. Kristin Lindow, the lead sovereign analyst for South Africa at Moody’s Investors Service, notes: “A strict fiscal policy and debt management framework has been a strong suit of the South African government since 1994.”

Two interim appointments, businessman Derek Keys and banker Chris Liebenberg, set the scene between 1994 and1996. Their role was to reassure the business community and foreign investors and to restore some order to the financial chaos bequeathed the ANC by the National Party.

But the real action started with the appointment of Trevor Manuel in June 1996. Described as “the father of ANC economic policies”, he resolutely resisted political pressure to provide unaffordable short-term – and short-lived – stimulus to the economy.

Manuel had, and still has, his critics, mostly inside the ANC. His Growth, Employment and Redistribution (Gear) framework, announced in 1996, fell short in one vital area. It failed to do what is essentially undoable – create immediate jobs. Job creation is a slow process that requires a broad range of long-term initiatives, many beyond the scope of the National Treasury.

However, Gear did address key problems: particularly a chronic budget deficit and its consequences.

Manuel’s positive performance came as a surprise to political commentators and financial markets. Stanlib chief economist Kevin Lings recalls that concerns were highlighted in 1996, when Manuel was appointed and “the rand exchange rate weakened by about 22 percent against the US dollar”.

Lings noted that, at the time of transition, the country faced a debt trap. He said many economic and political analysts believed it unlikely the new government would exercise “fiscal discipline” – in other words, keep spending under control. This perception soon changed, according to Lings, when the government “radically improved the process of tax collection, which led to revenue overruns in 11 of the past 15 years”.

Gordhan, in his previous job as commissioner of the SA Revenue Service, was responsible for this step change in administrative efficiency. He also succeeded in creating a culture of tax compliance.

Lindow noted: “The broadening of the revenue base and enforcement of revenue collection has been very effective, giving the government room to both lower tax rates and still have enough fiscal space when it came time to boost spending on infrastructure in the mid-2000s and then to implement counter-cyclical fiscal policy during the global crisis and domestic recession.”

Each finance minister has been aware of the dangers of breaching the benchmark budget deficit of 3 percent of gross domestic product (GDP). If the gap between revenue and spending is consistently more than 3 percent, the cost of debt eats into government resources, diverting funds from social and economic investment.

Transition costs delayed the process after 1994, but, by 2007, Manuel had achieved a small surplus. Macquarie Securities economist Elna Moolman noted this phase of fiscal consolidation allowed for a different approach when the world was hit by the 2008/09 global recession. The surplus disappeared and Gordhan allowed the deficit to breach 3 percent for a period – an approach described as counter-cyclical policy.

However, Moolman doubts whether the response was entirely cyclical. She points out that the sharp increases in government wages could create an additional structural burden on the fiscus.

Gordhan has his own concerns on this score. He set a time frame for reducing the deficit and attempted to rein in the burgeoning wage bill and eliminate wasteful spending, shifting the focus of the Budget to capital investment to support sustainable growth.

Despite his best efforts, he has been forced to push out initial rolling three-year deficit targets, creating doubts as to the timing of a return to the 3 percent level. The stalling domestic economy hit the pockets of local consumers and the damage to advanced economies reduced demand from the rest of the world, seriously eroding South Africa’s export income. Both factors have reduced the government’s potential tax take in recent years.

The deficit revisions, the unstable social backdrop and policy uncertainty within the ANC unsettled rating agencies and investors. In September 2012, Moody’s, the first rating agency to give South Africa an investment grade sovereign rating – in October 1994 – became the first to cut its rating. Standard & Poor’s (S&P) and Fitch soon followed suit. Moody’s and S&P have a negative outlook, which implies they expect further delays in returning to the benchmark 3 percent deficit.

However, Lindow concedes: “The government has made a firm commitment since October 2012 to keep within the medium-term expenditure ceilings, which we expect will be an important component of restoring fiscal sustainability in the context of weaker economic growth and revenue prospects.

“Moreover, the active effort to reduce the vulnerability of government finances to exchange rate and interest rate risks through active debt management continues to be a key credit strength, particularly in light of the rand’s volatility.”

The challenges have increased since May last year, when the US Federal Reserve signalled it would be reversing its easy money policy. Money, which had poured into emerging markets, started to flow out, sending currencies crashing and stalling economic growth.

The tapering process started last month when the Fed cut its $85 billion (R927bn) monthly quantitative easing (QE) bond buying programme by $10bn. It cut a further $10bn this month and the tapering is expected to continue through the year.

As capital flight constrains domestic expansion, the potential for collecting tax revenue reduces.

Meanwhile, the fiscal debate has become more complicated. Henry Flint, the head of research at Thebe Stockbroking, notes: “The current debate is not on how sustainable government finances are but on how effective government spending is against the backdrop of developmental goals. The poor state of public health care and education despite the allocation of significant resources are a case in point.”

Fiscal policy cannot work in isolation. It is embedded in an economic and social context; and policy co-ordination between government departments is essential. So far observers believe this has been lacking.

Business and investor confidence now hinges on the National Development Plan (NDP) incubated by Manuel – currently Planning Minister in the Presidency. Officially endorsed as ANC policy, it is contested on the party’s left and rejected by many trade unions. The creation of a new cabinet after the May election should point the way.