Duncan Pieterse, the new director-general of the National Treasury, may have the full confidence of the private sector and the markets, but he’s taken up the job at a very difficult time.
South Africa’s prospects have worsened considerably since the national budget was tabled in February. Recent data suggests the country is heading for a much larger than expected budget deficit as revenue declines on severe load-shedding and logistical constraints while expenditure has risen faster than expected.
The big question is how Pieterse’s Team Treasury will respond to this deteriorating fiscal picture. To stabilise the debt ratio now will require tax hikes and/or even larger and more harmful spending cuts to counterbalance rising debt service costs.
The problem is that deeper fiscal austerity, though necessary to halt the unsustainable build-up of debt, will further erode service delivery. That could make austerity politically impossible to push through ahead of next year’s election.
With just over six weeks before the medium-term budget is due to be tabled on November 1, the FM caught up with Pieterse, who has hit the ground running. Fortunately, he is an old hand at fiscal policy, having served the Treasury in various capacities over the past decade — including as the head of economic policy and most recently as the head of asset and liability management.
“Duncan [Pieterse] has impressed markets, investors and business with his attention to detail, and is both strategic and intellectual,” says Krutham MD Peter Attard Montalto. However, he feels Pieterse has an arguably harder job than many finance DGs in recent history.
“What we need is a return to detail and a focus on structural reform and state-owned enterprises on top of the DG’s usual day job of ensuring the government expenditure clown car doesn’t go over the fiscal cliff,” he says, “Duncan is exactly the person to deliver this.”
Citi economist Gina Schoeman also considers Pieterse a “valuable choice” — someone who is calm and consistent and whose deep public finance experience was gained during very volatile years.
“He’s also highly transparent and understands the needs of investors, especially offshore investors,” says Schoeman.
She believes Pieterse will show his worth in steering the Treasury through the “tumultuous period” ahead. Though, of course, the ultimate judge will be bond-market investors in terms of the risk premium they place on government debt.
The new Treasury DG has hit the ground running, but restoring SA to fiscal sustainability will be no easy task
— What it means:
The Treasury’s goal remains that of achieving fiscal sustainability. For Pieterse, it comes down to three things: stabilising debt and maintaining a prudent fiscal stance; supporting economic growth by furthering structural reform and by protecting as much as possible the critical infrastructure enablers (mainly Eskom, Transnet and the roads agency Sanral); and reducing fiscal risk.
“The question we’re grappling with ahead of the medium-term budget policy statement [MTBPS] is what combination of fiscal decisions [are] needed to stabilise debt (and improve the overall credibility of the fiscal framework) and support economic growth,” he says.
“The overall difficulty is how do you do these three things and also protect important social spending as much as possible,” Pieterse adds. “That’s our fiscal dilemma and the task that lies ahead of us between now and [the MTBPS].”
South Africa has been practising fiscal consolidation for years but, in the absence of faster growth, the debt ratio has kept climbing. With tax hikes almost inconceivable given the lack of growth, and the option to increase borrowing limited by the already high risk premium on government debt, even harsher fiscal austerity — including deeper cuts to the wage bill — is now called for.
The Treasury wants a hiring freeze across the government — excluding critical positions, as agreed by the Treasury and the department of public service & administration — a halt to advertising new infrastructure procurement contracts without Treasury approval, and for the 2023 wage settlement to be funded out of existing departmental budgets.
As the new DG, it is going to be up to Pieterse to say “no” to a lot of programmes, even very deserving ones, when they seek budgetary support.
How will he resist the intense political pressure to say “yes”? Where will the Treasury draw the line? And how will it hold that line?
“How does one say no? With the right processes, the right political support and following the evidence,” Pieterse replies. “When times are tough that’s what we rely on — the good people here in the National Treasury, the evidence, and the political support.”
The Treasury invests heavily in gathering evidence of what programmes are cost-effective. It also has “very robust” internal processes and joint technical structures with the rest of the government where policy choices and dilemmas are debated.
“The value of [my] growing up in the National Treasury is that it forces very good discipline in those areas,” he says. “As an institution we’re well geared for that but of course you can’t do that without the support of the minister and deputy minister of finance who help you manage these conversations in a politically appropriate way. We do engage quite robustly [when necessary].”
So, what will Pieterse be saying in these robust conversations with the rest of government?
“It’s about putting the idea of trade-offs at the centre of fiscal policy,” he explains. “That means that if a new spending priority is identified then what is the inefficient spending programme that can be let go to fund that priority?”
This is the crux of the Treasury’s battle with the rest of the government — politicians’ inability to make the tough policy trade-offs required. It has resulted in a growing contradiction between the Treasury’s fiscal consolidation efforts, as reflected in increasingly austere budgets, and the rest of government’s expansive policy agenda, as reflected in policies such as free higher education and National Health Insurance.
Another classic example of this policy dissonance is that three years after the introduction of the social relief of distress (SRD) grant, the government has still not decided whether it will form the basis of a more extensive basic income grant (BIG), opting instead for annual budget extensions and ad hoc regulation.
With the SRD grant due to expire on the eve of the next general election, there is a strong expectation that it will be renewed again or rolled into a more permanent, and possibly more generous, BIG — a promise that is likely to become a key plank of the ANC’s election campaign.
However, the Treasury hasn’t budgeted for the grant’s continuation beyond March next year (other than by padding out its unallocated reserve), thus keeping alive the prospect that its permanent extension could be reversed.
The Treasury hasn’t taken a clear public stand on this issue, other than to say that any permanent, structural increase in spending must be matched by an equally permanent increase in revenue (read higher taxes).
Pieterse refuses to be drawn so close to the MTBPS on whether the Treasury has done the research into whether South Africa can afford to make the SRD grant permanent or what its advice is to policymakers on this crucial issue.
What he can say is that he’s “confident” that the cabinet understands the fiscal situation. “But it’s a difficult problem to solve,” he adds. “Our job is to present these problems and possible solutions to them ... to strike the right balance.”
Pieterse has impressed markets, investors and business with his attention to detail, and is both strategic and intellectual … [but] he has an arguably harder job than many finance DGs in recent history
— Peter Attard Montalto
Pieterse is more vocal on where the Treasury stands when it comes to tax hikes, stressing the importance of taking on board the lessons learnt since 2015.
He cites the fact that the tax increases initiated during this period were slightly more harmful for growth than expected; that they didn’t in all cases raise the anticipated revenue; and that revenue started recovering in the past few years when tax rates stabilised.
What this means, he says, is that the Treasury must initiate another round of tax expenditure reviews to remove and limit underperforming tax incentives to protect the tax base. It also means pursuing measures that broaden the tax base and continuing to invest in the South African Revenue Service (Sars).
But, ultimately, it means “we have to avoid tax increases as far as possible and, if unavoidable, we must be clear about the trade-offs to the cabinet in terms of the effects on growth, tax morale and employment”.
Pieterse, who is Cape Town born and bred, attended Harold Cressy High School, whose alumni include Trevor Manuel and Edward Kieswetter. He holds bachelors, master’s and doctoral degrees in business science, all from the University of Cape Town, and a master’s degree in public administration from Harvard University. He could probably earn more in the private sector. So, what has kept him in government since 2013?
“Everyone joins the public sector to make a difference and at the National Treasury you have a unique and enormous opportunity to make a very big difference,” he says. “You also have an opportunity to work with some of the smartest people in the country and to do work, the depth and breadth [of which is] not easily found in the rest of government.”
One of his key priorities as DG will be to continue to invest in the Treasury as an institution and as a place where the staff can growth and thrive.
To unwind, Pieterse has become a regular runner. He also enjoys travelling within South Africa when time allows.
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