Covid-19, economic growth and South African fiscal policy

Stellenbosch Working Paper Series No. WP15/2020
 
Publication date: August 2020
 
Author(s):
[protected email address] (University of the Free State)
[protected email address] (University of Stellenbosch)
 
Abstract:

Even before Covid-19 South African fiscal policy was unsustainable, following years of fast-rising debt levels. We show this estimating a fiscal reaction function in a Markov-switching model. However, the effects of the Covid-19 crisis worsened the fiscal position further. To restore fiscal sustainability in the aftermath of the crisis some commentators argue that higher government expenditure will grow GDP sufficiently to stabilise the debt/GDP ratio. We reject this, showing that although a real increase in expenditure stimulates economic growth (a short-run, once-off effect), the public expenditure/GDP ratio exceeds the level at which an increase in the ratio positively impacts growth.

 
JEL Classification:

E62, E63, H62, H63

Keywords:

Covid-19, Coronavirus, Public debt, budget deficit, primary balance, economic growth, government expenditure, tax revenue

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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...

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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