Fiscal regime changes and the sustainability of fiscal imbalance in South Africa: a smooth transition error-correction approach

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.

Are fiscal budgets sustainable in South Africa? Evidence from provincial level data

“…Even though previous studies have been conducted on the subject matter for South Africa (i.e. Narayan & Nayaran, 2006;Nyamongo et al, 2006;Lusinyan & Thornton, 2007;Ndahiriwe & Gupta, 2010;Ghartey, 2010;Jibao et al, 2012;Baharumshah et al, 2016;and Phiri, 2017) we point out that these studies suffer some fundamental shortcomings. Firstlyt, a majority of these studies assume linearity in the cointegration analysis (i.e.…”

“…Firstlyt, a majority of these studies assume linearity in the cointegration analysis (i.e. Narayan & Nayaran, 2006;Nyamongo et al, 2006;Lusinyan & Thornton, 2007;Ndahiriwe & Gupta, 2010;Ghartey, 2010;Jibao et al, 2012;Baharumshah et al, 2016) a feature which may be oversimplifying the issue (see Bajo-Rubio et al, 2006 andEwing et al, 2006 for a discussion). Secondly, even when nonlinearity has been taken into consideration (i.e.…”

Relative Importance of Public Debts and Money Growth on Inflation in Nigeria

“…This is equivalent to saying that the deficit is sustainable if and only if the stock of real debt held by the government is expected to grow not faster than the average real rate of interest, which is viewed as a proxy for the growth rate of the economy. However, for this to happen, real debt must grow more slowly than the real interest rate, which is the growth rate of the discounting factor (Jibao, Schoeman, & Naraidoo, 2012). Therefore, equation (4) is reduced to;…”

Fiscal Sustainability in South Africa: Will History Repeat Itself?

“…More recently, time-series econometrics have been used to test aspects of the present value constraint (e.g. Ghatak and Sanchez-Fung, 2007;Jibao, Schoeman and Naraidoo, 2010;Lusinga and Thornton, 2009;Thiswaka-Kashala, 2006). Celasum, Debrun and Ostry (2007), while Burger, Stuart, Jooste and Cuevas (2012) estimate fiscal reaction functions and use various methods (OLS, VAR, TAR, GMM, state-space modelling and a VECM) to check the robustness of the results.…”