Covid-19, economic growth and South African fiscal policy

Stellenbosch Working Paper Series No. WP15/2020
Publication date: August 2020
Author(s):
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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