Abstract
In addition to the conventional linear cointegration test, this paper tests the asymmetry relationship between fiscal revenue and expenditure, by making a distinction between the adjustment of positive (budget surplus) and negative (budget deficit) deviations from equilibrium. The analysis uses quarterly data for South Africa. The paper reveals that government authorities in South Africa are more likely to react more quickly when the budget is in deficit than when in surplus, and that the stabilisation measures used by government are fairly neutral at low deficit levels; that is, at deficit levels of 4 per cent of GDP and below. We conclude that the assumption that adjustment towards equilibrium is always present and of the same strength under all circumstances, is not valid in the case of fiscal data on South Africa; and that that fiscal sustainability in South Africa has been attained at the expense of a reduction in the ratio of expenditure to GDP on education, and a relatively constant ratio of expenditure to GDP on health. The paper noted that a priori one would expect that such a decline in the allocations to sectors which could stimulate growth and which in turn could generate future revenue, may pose a threat to the accumulated fiscal space. In South Africa the main fiscal challenge, therefore, is to find ways through which the recent gains in fiscal solvency can be consolidated.
Highlights
Developments which followed the sub-prime crisis have led to renewed debate on fiscal sustainability: the massive degree of fiscal intervention, with corresponding increases in deficits and debt, are a concern
The empirical result shows that a 1 per cent increase in the government budget deficit implies variation in the transition function that is larger than the corresponding 1 per cent increase in a budget surplus,7 showing that in this phase the South African government becomes more concerned about solvency or fiscal sustainability
Our findings suggest that fiscal policy over the sampled period has been sustainable, since the historical processes in South Africa are consistent with the inter-temporal government budget constraint
Summary
Developments which followed the sub-prime crisis have led to renewed debate on fiscal sustainability: the massive degree of fiscal intervention, with corresponding increases in deficits and debt, are a concern. Several of the empirical studies on fiscal sustainability, focus on the time series behaviour of tax revenues and expenditures, as well as debt series, to investigate whether the behaviour of these series is consistent with the inter-temporal budget balance. Van der Merwe (1994) argued that fiscal policy in South Africa is unsustainable due to the large gap between real interest rates and real economic growth as well as the relatively large size of the deficit. The switching between regimes is controlled by the state of the fiscal balance This feature of the smooth transition model allows us to test the ability of high against low budget deficits or surpluses to best describe the non-linear dynamics of fiscal policy in South Africa.
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