The sustainability of South African fiscal policy

The public-debt-to-GDP ratio in South Africa increased from 26 per cent in the 2008/09 fiscal year to 73.9 per cent in 2023/24, raising fears that fiscal policy is not sustainable. This raises the question: did the government take steps to arrest the increase in the debt-to-GDP ratio and regain fiscal sustainability, and if so, why did they fail? Establishing fiscal sustainability can be done directly or indirectly. Doing it directly entails the government increasing the primary balance in reaction to higher debt levels. Hence, this paper presents a fiscal reaction function. The analysis shows that during the period in which the public-debt-to-GDP ratio rose, the primary balance did indeed react to an increased debt burden, but its level remained too low to arrest the increase in the public-debt-to-GDP ratio. The analysis also assesses whether fiscal fatigue set in, wherein the responsiveness of the primary balance to the debt burden is positive but eventually weakens. Some evidence for the presence of fiscal fatigue is present. One indirect approach to establishing fiscal sustainability is through the impact of expenditure and revenue on economic growth. Leaving revenue for further study later, this paper presents an adapted growth equation to investigate the impact on growth of general government investment and consumption expenditure, and of public (and private) corporation investment. While the effect of private sector investment is positive, neither general government nor public corporation investment has a statistically significant impact on growth. Furthermore, government consumption has a negative impact on growth.