An Estimation of the Effect of Tax Revenue Collection on the Public Debt in South Africa

Abstract

Public debt is the most important economic indicator in such a way that if it is unsustainable, higher interest costs could detriment significant public investments that ensure economic growth. Most of developing economies including South Africa are known to be having unsustainable public debt levels coupled with poor economic growth. Irrespective of governments’ measures to service the public debt, like selling enough bonds, taxpayers end up carrying the debt. Hence, the main objective of this paper is to estimate an empirical effect of tax revenue collection on public debt in South Africa. Public debt is treated as the dependent variable and tax revenue collection as the main independent variable in addition to secondary independent variables such as foreign direct investment, political instability and corruption. This paper uses econometric techniques such as Auto Regressive Distributed Lags (ARDL) and Nonlinear Auto Regressive Distributed Lags (NARDL). This paper finds long and short run negative relationship between the South African tax revenue collection, foreign direct investment and public debt (symmetric relationships). This relationship is statistically significant. This paper also finds positive and negative long run relationship between political instability, corruption and public debt in South Africa (asymmetric). In the short run, a positive relationship between political instability, corruption and public debt is established in this paper (symmetric relationships). Furthermore, this paper established significant short run relationship between corruption and public debt. This paper recommends that government ought to re-channel its expenditure programs by identifying sectors that are more productive (productive expenditures), and invest in them as government would be able to recoup the resources, and consequently generate more income which would possibly be in taxes and/or net received receipts. This would reduce government’s over-reliance on the tax revenue collection to finance both current and capital government expenditures, and also to service its public debt.