Fiscal multipliers in South Africa after the global financial crisis

Abstract

Background: South Africa’s fiscal position has deteriorated considerably over the last 10 years, with debt levels reaching historical highs in the post-apartheid period. National Treasury’s intentions for fiscal consolidation have again drawn attention to the fiscal multiplier literature.

Aim: The aim in the study is to calculate the size of fiscal expenditure multipliers over the period 2009 to 2019, taking into account the specific economic conditions and the funding choices of government.

Setting: In the study fiscal policy is considered at a time when the debt to gross domestic product (GDP) ratio was rising rapidly.

Methods: We use an econometric model to calculate the fiscal multipliers over the past decade. Our estimates take account of the specific fiscal conditions for each year, in particular the changing relationship between debt and the sovereign risk premia as well as the impact of tax increases.

Results: The model suggests that the fiscal multiplier declined from 1.5 in 2010 to around zero in 2019 as the debt levels became progressively more unsustainable and large tax increases muted the aggregate demand effects from higher government expenditure.

Conclusion: The low fiscal multipliers suggest that fiscal consolidation will be less costly in terms of growth forgone than generally perceived.

JEL classification: C50, E62, H62, H63