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Covid‐19, Economic Growth and South African Fiscal Policy
Author(s) -
Burger Philippe,
Calitz Estian
Publication year - 2021
Publication title -
south african journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.502
H-Index - 31
eISSN - 1813-6982
pISSN - 0038-2280
DOI - 10.1111/saje.12270
Subject(s) - fiscal sustainability , economics , fiscal policy , fiscal imbalance , monetary economics , debt , deficit spending , revenue , government (linguistics) , sustainability , fiscal union , economic policy , macroeconomics , finance , ecology , linguistics , philosophy , biology
Following years of fast‐rising debt levels, we show that the Covid‐19 crisis worsened an already deteriorating fiscal position in South Africa. To restore fiscal sustainability in the aftermath of the crisis some commentators argue that higher government expenditure will grow GDP sufficiently to stabilise the debt/GDP ratio. We reject this, showing that although a real increase in expenditure stimulates economic growth (a short‐run, once‐off effect), the public expenditure/GDP ratio exceeds the level at which an increase in the ratio positively impacts growth. We then explore the past efforts of government to maintain or restore fiscal sustainability by estimating a fiscal reaction function using a Markov‐switching model. Following the impact of the Covid‐19 crisis on the budget, we subsequently establish the deficit, expenditure and revenue adjustments that the government will have to make to restore fiscal sustainability. Finally, we consider the merits of introducing a debt ceiling.