The public sector balance sheet and fiscal consolidation in South Africa

Stellenbosch Working Paper Series No. WP11/2015
 
Publication date: 2015
 
Author(s):
[protected email address] (Department of Economics, University of the Free State)
[protected email address] (Department of Economics, University of Stellenbosch)
[protected email address] (Department of Economics, University of Stellenbosch)
 
Abstract:

South Africa has a long record of relatively good fiscal outcomes. However, because of the Great Recession and the subsequent countercyclical fiscal policy, the fiscal situation has worsened markedly since 2010. The aim of this paper is twofold: (1) to assess how the government re-established fiscal sustainability in the past, and (2) on the basis of literature and lessons learned from this past, and given current increasing debt levels, to consider how best the government could consolidate fiscal policy and re-establish fiscal sustainability in the short- to medium term. To assess past fiscal policy the paper uses a Markov-switching model to estimate a fiscal reaction function for the primary balance. This establishes whether or not the primary balance reacted to ensure fiscal sustainability. The analysis identifies high and low debt/GDP regimes and shows that fiscal policy has been in a high debt regime since 2010. It also shows that for most of the period prior to 2010 the primary balance adjusted to ensure a sustainable debt burden. However, the reduction in the public debt/GDP ratio from 1994 to 2008 was accompanied by a similar decrease in government’s fixed capital/GDP ratio. Hence, the reduction in the debt/GDP ratio contributed to fiscal sustainability, but did not improve the government’s balance sheet. On the basis of these findings the paper suggests that the government has two options for restoring fiscal sustainability in the short- to medium term: (1) reduce the public debt/GDP ratio to its pre-crisis level, or stabilise the ratio at its post-crisis level. At the heart of this choice is the requirement to balance the need to finance much-needed public infrastructure with the need to return to a low debt/GDP ratio in order to have room for countercyclical fiscal policy in future recessions.

 
JEL Classification:

H62, H63, H68

Keywords:

Fiscal sustainability, public debt, budget deficit, primary balance

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1 March 2021
Even with the release of data showing a record high unemployment rate in 2020Q4, it turned out to be a fairly good week for the SA economy. Daily new COVID-19 infections remained well contained, while the second batch of 80 000 J&J vaccines arrived (albeit controversially with the grounded SAA being the carrier). In addition, relative to the October...

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BER Weekly

1 March 2021
Even with the release of data showing a record high unemployment rate in 2020Q4, it turned out to be a fairly good week for the SA economy. Daily new COVID-19 infections remained well contained, while the second batch of 80 000 J&J vaccines arrived (albeit controversially with the grounded SAA being the carrier). In addition, relative to the October...

Read the full issue