Abstract
In South Africa, substantial government dissaving as well as poor household savings performance has caused a decline in aggregate savings. Whilst government dissaving has been successfully reversed, household savings continue to fall. Low domestic savings have required South Africa to attract large, volatile portfolio capital inflows to fund a structural current account deficit. Repeated reversals of such inflows have constrained domestic growth and hence an understanding of the factors that have caused this decline in savings is essential in order to formulate policies supportive of sustained higher rates of economic growth. Within the context of the existing literature, this article examines the various determinants of household savings using a vector error-correction model (VECM). The results suggest that interest rates, a wealth effect and upturns in the business cycle all contribute to explaining the decline in household savings. The presence of a partial offset between household savings and government savings also has important implications for the effectiveness of using the fiscal position of the South African government to boost savings.
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