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

Public spending, credit market conditions and economic activity in South Africa

“…Fern andez-Villaverde ( 2010) and Carrillo and Poilly (2013), for example, show that the fiscal multiplier's magnitude rises significantly when there are financial frictions that affect a representative firm's balance sheet. Among the few South African studies (Makrelov et al, 2020;Merrino, 2021;van Rensburg et al, 2022) that incorporate financial sector dynamics into their model, the most similar to ours is the study of Merrino (2021), who employs local projections to examine the effects of shocks to public spending across economic recessions and expansions using output gap as a switching variable.…”

“…As a result, this research contributes to the expanding body of knowledge that uses non‐linear models to examine the effect of fiscal policies in South Africa (see, e.g . Akanbi, 2013; Kemp, 2020; Makrelov et al, 2020; Merrino, 2021; Nuru, 2019; Van Rensburg et al, 2022). However, most of these contributions overlook that the financial sector plays an important role in amplifying public spending shocks, despite evidence from the worldwide literature that this is a crucial channel.…”

“…However, most of these contributions overlook that the financial sector plays an important role in amplifying public spending shocks, despite evidence from the worldwide literature that this is a crucial channel. Among the few South African studies (Makrelov et al, 2020;Merrino, 2021;van Rensburg et al, 2022) that incorporate financial sector dynamics into their model, the most similar to ours is the study of Merrino (2021), who employs local projections to examine the effects of shocks to public spending across economic recessions and expansions using output gap as a switching variable.…”

The economic context of realizing socioeconomic rights in South Africa

“…The report was prepared by Dullah Omar Institute, University of the Western Cape, Black Sash, the Socio-economic Rights Institute of South Africa, Studies in Poverty Inequality Institute, and Peoples' Health Movement. Most of these institutions are also listed in footnote 2 as members of the Economists Initiative and the BJC.4 Janse vanRensburg et al (2021) found that the multiplier in crisis times is less than one, meaning that the GDP increase resulting from the expenditure increase is less than the expenditure increase. This finding is borne out byBurger and Calitz (2021), who also demonstrate that the short-run multiplier effect is smaller than one, and that the government expenditure/GDP ratio in South Africa since 2015 exceeds the level (29%) at which an increase in…”

The macrologistics effect of a state-owned enterprise, Transnet, on the South African economy

“…While various other sources of multiplier literature were consulted(Batini, Eyraud & Weber 2014:10;Janse Van Rensburg, De Jager & Makrelov 2022;Ramey 2019), the multipliers employed in this article were largely informed by gross domestic product (GDP) multipliers for South Africa (split by sector) found in 2013 research by Burrows and Botha. Although their research only presents multipliers between 1980 and 2010 in 5-year intervals, more recently,Schröder and Storm (2020:11) stated that the average trends seen in Burrows and Botha's work still hold true.…”