Tax revenue as an automatic fiscal stabiliser: A South African perspective

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.