Six months ago, most South Africans would have considered a failure to pass a budget a catastrophic financial event. Yet here we are, still with no budget two months after it should have been tabled, and most people are just getting on with it. The government continues to work, and the real economic impact has been negligible. But as the National Treasury works on its third attempt at an acceptable budget, there are serious risks ahead.

There has obviously been lots of heat, with court clashes over VAT and political standoffs. But it is remarkable how much agreement there is on one thing: the importance of maintaining the fiscal trajectory — in other words, keeping debt under control. The debate has really been about how to increase revenue or how to cut costs. No-one has explicitly advocated for more debt.

That is why the rand and yields have been more-or-less calm throughout the (ongoing) uncertainty. Yields have ticked up at longer-dated maturities, but global trade disruption has been a factor too. Investors have quickly recognised that the legal framework for the budget is robust, and the political will to avoid any populist splurges was fairly universal.

That likely reflects the lessons learnt from the Jacob Zuma era. For a decade budgets were set free to expand without matching revenue growth. The result was a rapid deterioration in debt-to-GDP ratios. In 2008, when the financial crisis hit and a year before Zuma become president, debt was a paltry 24% of GDP.

That was the culmination of excellent fiscal management under the new government. But then the wheels started to come off. While the post-financial-crisis recession would have driven greater deficit spending as part of a countercyclical policy, we quickly became addicted to increasing debt. By 2020 it had hit 68.9% when the Covid-19 shock meant there was no fiscal breathing room to turn to countercyclical spending again. SA’s last investment grade credit rating was yanked that year.

Real fears were triggered that SA’s deficit was set to overwhelm financial stability, with plunging tax collections making it harder for the government to pay its debts. The prospect of an IMF-led bailout package started to look likely. With it, the usual package of deep austerity would have meant upending the state-led model that had built one of the biggest welfare states in the world, with a huge public sector workforce.

We stared over the precipice but then stepped back. There was some good luck — at the start of Covid-19 commodity prices soared, creating an unexpected boon in the form of mining royalties and profit taxes. But also, a tough spending stance was taken by the Treasury, ruthlessly emphasising that fiscal credibility had to be restored, despite the huge pressures Covid-19 was putting on public finances.

Through luck and bloody-mindedness, in 2021 there was a tick down in debt-to-GDP for the first time since 2008. Markets began to believe the Treasury’s story and risk premiums for SA debt began to stabilise. For the first time ratings agencies took a positive outlook on credit ratings (well, one of them, S&P Global, so far).

However, there is still much work to do. The violence done to the financial position of the state-owned enterprises in particular has made it hard to turn the tide. The Treasury now expects debt-to-GDP to stabilise at 76.2% in the current financial year and then start to decline. It is very important that the Treasury delivers on that objective.

It is remarkable that politically everyone seems to agree on that objective. The MK party, whose political alter ego was a major contributor to the state’s debt headaches, has been strident in rejecting VAT and complaining about austerity, but stops short of calling for the deficit to grow. The EFF has called for lawful and transparent processes. It has rejected expenditure cuts, but called for higher taxes on the rich instead. Again, no-one is suggesting deficit spending.

Of course, the reality is that deficit spending is what you get if you don’t cut expenditure or increase tax. That is just the maths of it. The Treasury had gone for a VAT increase because it is the only lever left that could meaningfully increase new revenue. The EFF and MK party’s calls for more taxes on the rich have to contend with clear evidence that income and corporation taxes are at the top of the Laffer curve — increases just displace economic activity into other jurisdictions. While there is room at the margins, increases are not going to cover the R68.6bn VAT increases were going to raise over the next three years. The only way deficits are going to be avoided is spending cuts.

That political reality still has to be widely embraced. The DA seems to understand it, as does the ANC. It is remarkable, though, that the Treasury initially felt VAT increases were easier to pull off than spending cuts. It is now up to the cabinet and the government of national unity to show that wasn’t true. With the politics of VAT increases now amply aired, the consequences need to sink in.

The Treasury has in fact done the work on what cuts could be done with the least pain. Government spending has grown from 23% to 33% of GDP since 2008 — it simply has to be reined in. Market comfort is only going to fully return once the government — with all its political parties — faces up to that fact and gets into gear to deliver it.

The Treasury must go back to the cabinet with a new plan. I hope this time it benefits from substantive engagement. If we are going to maintain our path out of the Zuma-created fiscal hole, spending reductions must happen. There are going to be losers when specific line items are singled out — politicians are going to have to stomach the fact that not everyone will be happy. It is the next big test of our political system, on which investor confidence will be made or broken.

• Stuart Theobald is chair of research-led consultancy Krutham.

This article first appeared in Business Day.