Abstract
The many practical economic and political difficulties encountered in discretionary fiscal stabilisation policy highlight the potential benefits of allowing automatic fiscal stabilisers to operate over the cycle. This article investigates the relevance of tax revenue as an automatic fiscal stabiliser in the South African economy by an empirical analysis of its role and impact since the 1970s. The study finds that cyclical changes in tax revenue are relatively small and provide no significant evidence of automatic stabilisation; however, the potential of this tool as an effective automatic fiscal stabiliser in South Africa cannot be overlooked as results show a high correlation between the output gap and automatic stabiliser estimates. Automatic fiscal stabilisers were employed symmetrically over the cycle and results showed that automatic fiscal stabilisers became increasingly important towards the end of the sample period.
Highlights
AND BACKGROUNDThe way in which the government allocates its spending, collects its taxes and finances its deficit has important implications for the economy
Since fiscal discipline is more or less confined in the South African government's GEAR strategy, it is in the latter case where automatic fiscal stabilisers can play an important role
The main determinants of the size of automatic fiscal stabilisers associated with the tax system include the importance of the government sector in the economy, the tax structure, the progressivity of the tax system, the sensitivity of individual tax bases to the cycle, reforms in tax rates and structures and the distribution of income across individuals
Summary
The way in which the government allocates its spending, collects its taxes and finances its deficit has important implications for the economy. This article highlights the fiscal policies pursued by the South African government since the 1970s with specific reference to the role of taxes in stabilisation policy. The main focus is on the magnitude and composition of general government tax revenue and its role and potential as an automatic fiscal stabiliser in South Africa.
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