Sustainable fiscal policy and economic growth in South Africa

Following years of fast-rising public debt levels and low economic growth, how can the South African government re-establish fiscal sustainability? To assess the sustainability of South African fiscal policy, we use Markov-Switching VARs to estimate fiscal reaction functions. The fiscal variables considered are the primary balance, total non-interest expenditure, total expenditure and total revenue. The MS-VAR also considers the impact of fiscal policy on economic growth. We subsequently consider what size of primary balance adjustment is required to stabilise the public debt/GDP ratio, followed by an assessment of the various revenue and expenditure adjustment options open to government to achieve the required primary balance adjustment. We find little scope to increase revenue, and that government’s salary bill and goods-and-services budget should carry the load of the adjustment. In addition, state-owned enterprises (SOEs) should be restructured urgently to arrest the fiscal risk SOE debts and guarantees hold for government finances.

E62; E63; H62; H63

Public debt; budget deficit; primary balance; economic growth; government expenditure; tax revenue