A fiscal rule to produce counter-cyclical fiscal policy in South Africa

Stellenbosch Working Paper Series No. WP13/2007
 
Publication date: 2007
 
Author(s):
[protected email address] (Department of Economics, Stellenbosch University)
[protected email address] (Department of Economics, Stellenbosch University)
 
Abstract:

This paper considers the role of fiscal policy as a component of stabilisation policy in South Africa. The South African economy – like many others, most notably the United States – has experienced considerable economic stability over the last decade. At stake in this paper is whether fiscal policy had intentionally or unintentionally contributed to this favourable outcome. A number of techniques are used to investigate the cyclicality of fiscal outcomes since the early 1990s in South Africa and the evidence does not support claims that South African fiscal policy had been pro-cyclical (and hence destabilising) overt this period. But to prevent potential fiscal pro-cyclicality from becoming a reality in South Africa a package of reforms is derived that is consistent with the empirical evidence presented. The recommended reform includes: firstly, a fiscal rule that includes the following features: a numerical limit on the ratio of government expenditure to GDP and a commitment to a balanced budget (adjusted for the economic cycle), which would allow automatic revenue stabilisers to ensure a counter-cyclical policy. Secondly, a procedural rule that requires an independent business cycle commission to calculate potential GDP, the output gap and the adjustments required to calculate the structural budget balance. This depoliticised commission will enhance fiscal transparency and prevent the temptation by fiscal authorities to adjust these estimates, which have undermined some fiscal rules in practice.

 
JEL Classification:

E320, E610, E620, E630

Keywords:

Fiscal policy, Stabilisation policy, Structural budget balance, Fiscal stance, Fiscal rules

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22 February 2021
As is often the case, domestic financial markets largely ignored local developments, including a lower-than-expected January consumer inflation print, last week and were swept along by the intensification of the global reflation trade. Outside of the inflation release, the domestic data releases continued to show that there was still some recovery momentum...

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