A fiscal rule to produce counter-cyclical fiscal policy in South Africa
Stellenbosch Working Paper Series No. WP13/2007Publication date: 2007
Author(s):
[protected email address] (Department of Economics, Stellenbosch University)
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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16 May 2025 Trade truce lifts markets, SA braces for winter load-shedding and budget reckoningThis week, data showed that South Africa’s unemployment rate rose in 2025Q1, with net job losses compared to 2024Q4. Meanwhile, mining output improved in March but declined overall for the quarter. In the US, inflation eased to a four-year low, while Germany’s economic sentiment rebounded sharply. The UK economy posted impressive growth in Q1; however,...
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Upcoming Seminars
Monday 26 May 202512:00-13:00
Prof Simon Franklin: Queen Mary University In London
Topic: "No Place Like Home? The Causal Effect of Housing Clearances in Central Addis Ababa"
12:00-13:00
Dr Dawie van Lill: South African Reserve Bank & Stellenbosch University
Topic: "TBC"
12:00-13:00
Prof Hylton Hollander: University Of Cape Town
Topic: "TBC"
BER Weekly
16 May 2025 Trade truce lifts markets, SA braces for winter load-shedding and budget reckoningThis week, data showed that South Africa’s unemployment rate rose in 2025Q1, with net job losses compared to 2024Q4. Meanwhile, mining output improved in March but declined overall for the quarter. In the US, inflation eased to a four-year low, while Germany’s economic sentiment rebounded sharply. The UK economy posted impressive growth in Q1; however,...
Read the full issue