Fiscal Consolidation and the Public Sector Balance Sheet in South Africa

• DOI: http://doi.org/10.1111/saje.12126
• Published date: 01 December 2016
• Author: Estian Calitz,Philippe Burger,Krige Siebrits
• Date: 01 December 2016

FISCAL CONSOLIDATION AND THE PUBLIC SECTOR

BALANCE SHEET IN SOUTH AFRICA

PHILIPPE BURGER*, KRIGE SIEBRITS

†

AND ESTIAN CALITZ

†

Abstract

Between 1994 and 2008 the South African government reduced its debt/GDP ratio from almost

50% to 27%. Unfortunately this reduction was accompanied by a signif‌icant decrease in govern-

ment’s f‌ixed capital/GDP ratio from 90% to 55% – f‌iscal sustainability might have been restored,

but government’s balance sheet did not improve. A similar story can be told for State Owned

Enterprises. Since the Great Recession the f‌iscal situation worsened markedly – the public debt

ratio again approaches 50%. To restore f‌iscal sustainability this article suggests that the govern-

ment faces two options: (1) to create room for future countercyclical policy, the government

must cut current expenditure and reduce the public debt/GDP ratio to its pre-crisis level, or (2)

substitute much-needed infrastructure capital expenditure for current expenditure while stabilis-

ing the debt/GDP ratio at its post-crisis level. Given that the much lower f‌ixed capital/GDP ratio

inhibits economic growth, the latter option might be more sensible.

JEL Classif‌ication: H62, H63, H68

Keywords: Fiscal sustainability, public debt, budget def‌icit, primary balance

1. INTRODUCTION

Several studies have shown that South African f‌iscal policy has been sustainable ever since

the Second World War (cf. Section 2). However, largely because of the effects of the

Great Recession and the strong countercyclical policy response to this shock, the f‌iscal sit-

uation has worsened markedly from 2010 onwards. The consolidated budget balance

deteriorated from a surplus of 1.7% of GDP in 2007/08 to a def‌icit of 4.2% in 2009/10

(National Treasury, 2009: 49; 2012: 38). Partly because of the anaemic economic recov-

ery, the def‌icit has been persistent: it was estimated at 3.9% of GDP at the end of the

2014/15 f‌iscal year (National Treasury, 2015: 30). As shown in Fig. 1, this resulted in a

sharp increase in the gross loan debt of the central government from 26.6% of GDP in

2007/08 to an estimated 46.2% in 2014/15, a level reached only once before in the last

four decades (cf. National Treasury 2015: 208–209). Thus, there are signs that f‌iscal pol-

icy might have been unsustainable since the outbreak of the Great Recession.

Studies by Burger, Stuart, Jooste and Cuevas (2012) and Burger and Marinkov (2012)

indicate that f‌iscal policy has largely been sustainable in the past. However, the sample

period of these studies ran up to 2010, which means they covered too few years since

2008 to assess whether or not f‌iscal policy remained sustainable after the outbreak of

the Great Recession. Thus, the f‌irst objective of this article is to assess the sustainability of

f‌iscal policy since the outbreak of the Great Recession.

* Corresponding author: Professor of Economics, Department of Economics, University of the

Free State, South Africa. Tel: 127 51 401 2626, Fax: 127 51 4446758. E-mail: BurgerP@ufs.ac.za

†

Department of Economics, University of Stellenbosch, South Africa

V

C2016 Economic Society of South Africa. doi: 10.1111/saje.12126

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South African Journal of Economics Vol. 84:4 December 2016

South African Journal

of Economics

Using a Markov-switching (MS) model that can potentially distinguish between peri-

ods of sustainability and unsustainability, the analysis below indeed indicates that f‌iscal

policy has been unsustainable since 2010. Hence, a concerted f‌iscal consolidation effort

is required to stabilise public f‌inances and to ensure f‌iscal sustainability in the medium

to longer run. The South African Government committed itself to a f‌iscal consolidation

plan in the 2014 Medium Term Budget Policy Statement (National Treasury, 2014) and

spelt out the details in the 2015 Budget (National Treasury, 2015). The medium-term

estimates summarised in Table 1 show that the f‌iscal authorities envisage a drop of 1.4%

points in the budget def‌icit to 2.5% of GDP by the end of the 2017/18 f‌iscal year.

Hence, the second objective of the article is to ascertain how the government can re-

establish f‌iscal sustainability. Since f‌iscal sustainability was seemingly restored in the late

1990s and 2000s, the question is whether or not a similar approach should be pursued

to re-establish f‌iscal sustainability following the recent bout of unsustainability. The anal-

ysis, however, will indicate that in the 1990s and 2000s the reduction in the public debt/

GDP ratio accompanied a reduction in the government’s f‌ixed asset/GDP ratio – thus

the government attained f‌iscal sustainability by, among other things, allowing the infra-

structure/GDP ratio to deteriorate. The discussion below will therefore consider the

options open to government to restore f‌iscal sustainability.

Figure 1. South Africa’s gross national debt/GDP ratio, 1980-2013

Source: South African Reserve Bank.

Table 1. National Treasury’s envisaged medium-term consolidation of the f‌iscal framework

for South Africa

2014/15 2015/16 2016/17 2017/18

Percentages of GDP Revised estimates Medium-term estimates

Revenue 28.1 28.4 29.3 29.2

Expenditure 32.0 32.2 31.9 31.7

Non-interest 28.9 29.1 28.7 28.5

Interest 3.1 3.2 3.2 3.2

Budget balance 23.9 23.9 22.6 22.5

Source: National Treasury (2015: 30).

502 South African Journal of Economics Vol. 84:4 December 2016

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C2016 Economic Society of South Africa.