SOUTH AFRICA'S TRANSITION TO A CONSOLIDATED BUDGET

• Published in: The South African Journal of economics Vol. 80; no. 2; pp. 181 - 199
• Main Authors: JOOSTE, CHARL, MARINKOV, MARINA
• Format: Journal Article
• Language: English
• Published: Malden, USA Blackwell Publishing Inc 01.06.2012; Wiley Subscription Services, Inc
• Subjects: Africa; Africans; automatic stabilisers; Budget constraint; Budget deficit; Budget deficits; Business cycles; Consolidation; Debt; Debt management; E61; E62; Economic stabilization; Fiscal consolidation; Fiscal policy; gap model; Open economies; Size; South Africa; Studies; Sustainability; SVAR; Tax rates; South Africa
• ISSN: 0038-2280; 1813-6982
• DOI: 10.1111/j.1813-6982.2011.01294.x

The size of South Africa's fiscal stimuli, whether intended or not, has helped to avert negative consequences of the global financial downturn. With the economic cycle turning again, consolidation of deficits and a reduction of the level of debt are again the focus of policymakers. These outcomes are generally achieved by either increasing tax rates or cutting spending (discretionary fiscal policy), whereas an alternative option is to allow automatic stabilisers to consolidate budgets. This study attempts to answer whether cyclical factors or discretionary policy minimise output volatility and which one of the two presents a better policy option regarding uncertainty in real economic recovery. For this purpose, a small open‐economy gap model is built using South African data, where the budget deficit is endogenised by way of a fiscal policy “rule.” Sensitivity analyses and robustness checks are carried out using a structural vector autoregression. Given the estimates of both the automatic stabilisers as well as the components of discretionary fiscal policy, we are able to obtain impact multipliers on output and conduct scenario testing for optimal fiscal policy response towards fiscal consolidation as well as debt sustainability.