IDEAS home Printed from https://ideas.repec.org/a/gam/jecomi/v11y2023i5p141-d1142246.html
   My bibliography  Save this article

Time-Varying Elasticity of Cyclically Adjusted Primary Balance and Effect of Fiscal Consolidation on Domestic Government Debt in South Africa

Author

Listed:
  • Eugene Msizi Buthelezi

    (School of Accounting, Economics and Finance, University of KwaZulu-Natal, Pietermaritzburg 3219, KwaZulu-Natal, South Africa)

  • Phocenah Nyatanga

    (School of Accounting, Economics and Finance, University of KwaZulu-Natal, Pietermaritzburg 3219, KwaZulu-Natal, South Africa)

Abstract

This paper investigates the impact of the time-varying elasticity of the cyclically adjusted primary balance (CAPB) and fiscal consolidation on government debt. The time-varying parameter structural vector autoregression (TVP-VAR) model is used on a time series of data from 1979 to 2022. The contribution of this paper is on the understanding of the impact of fiscal consolidation on domestic government debt and the need to use time-varying elasticity when calculating the cyclical adjusted primary balance to provide a more accurate representation of discretionary actions taken by fiscal authorities. It is found that there is more variation in the CAPB with time-varying elasticity than with constant elasticity. Constant elasticity is not effective in capturing fiscal consolidation episodes, and time-varying elasticity is a better alternative. There is evidence that fiscal consolidation increases domestic government debt. The shocks of fiscal consolidation through government expenditure cuts reduce domestic government debt in the long run, while taxes increase domestic government debt. It is recommended that fiscal authorities use fiscal consolidation to reduce government expenditure that is related to inefficient expenditure. In the event of government expenditure, this expenditure needs to be in productive sectors of the economy that will bring about an increase in revenue rather than an increase in the tax rate. Given the result, a tax increase should be something that fiscal authorities are not using in the effort to stimulate economic growth or reduce domestic government debt.

Suggested Citation

  • Eugene Msizi Buthelezi & Phocenah Nyatanga, 2023. "Time-Varying Elasticity of Cyclically Adjusted Primary Balance and Effect of Fiscal Consolidation on Domestic Government Debt in South Africa," Economies, MDPI, vol. 11(5), pages 1-27, May.
    • Handle: RePEc:gam:jecomi:v:11:y:2023:i:5:p:141-:d:1142246
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-7099/11/5/141/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2227-7099/11/5/141/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Annalisa Fedelino & Mark A Horton & Anna Ivanova, 2009. "Computing Cyclically-Adjusted Balances and Automatic Stabilizers," IMF Technical Notes and Manuals 09/05, International Monetary Fund.
    2. Mr. Emanuele Baldacci & Mr. Sanjeev Gupta & Mr. Carlos Mulas-Granados, 2013. "Debt Reduction, Fiscal Adjustment, and Growth in Credit-Constrained Economies," IMF Working Papers 2013/238, International Monetary Fund.
    3. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
    4. Philippe Burger & Chandapiwa Jimmy, 2006. "Should South Africa Have A Fiscal Rule?," South African Journal of Economics, Economic Society of South Africa, vol. 74(4), pages 642-669, December.
    5. Afonso, António & Alves, José & Jalles, João Tovar, 2022. "To consolidate or not to consolidate? A multi-step analysis to assess needed fiscal sustainability," International Economics, Elsevier, vol. 172(C), pages 106-123.
    6. Alberto Alesina & Silvia Ardagna, 2013. "The Design of Fiscal Adjustments," Tax Policy and the Economy, University of Chicago Press, vol. 27(1), pages 19-68.
    7. Alberto Alesina & Roberto Perotti, 1997. "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 210-248, June.
    8. Ant�nio Afonso, 2010. "Expansionary fiscal consolidations in Europe: new evidence," Applied Economics Letters, Taylor & Francis Journals, vol. 17(2), pages 105-109, January.
    9. Cláudia Braz & Maria Manuel Campos & Sharmin Sazedj, 2019. "The new ESCB methodology for the calculation of cyclically adjusted budget balances: an application to the Portuguese case," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    10. Brady, Gordon L. & Magazzino, Cosimo, 2018. "Government debt in EMU countries," The Journal of Economic Asymmetries, Elsevier, vol. 18(C), pages 1-1.
    11. Ms. Annalisa Fedelino & Mr. Mark A Horton & Anna Ivanova, 2009. "Computing Cyclically-Adjusted Balances and Automatic Stabilizers," IMF Technical Notes and Manuals 2009/005, International Monetary Fund.
    12. Christian Breuer, 2019. "State Expansionary Austerity and Reverse Causality: A Critique of the Conventional Approach," Working Papers Series 98, Institute for New Economic Thinking.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Eugene Msizi Buthelezi & Phocenah Nyatanga, 2023. "Threshold of the CAPB That Can Be Attributed to Fiscal Consolidation Episodes in South Africa," Economies, MDPI, vol. 11(6), pages 1-26, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Breuer, Christian, 2013. "On the Identification and Macroeconomic Effects of Discretionary Changes in Fiscal Policy," MPRA Paper 52056, University Library of Munich, Germany, revised 22 Nov 2013.
    2. Eugene Msizi Buthelezi & Phocenah Nyatanga, 2023. "Threshold of the CAPB That Can Be Attributed to Fiscal Consolidation Episodes in South Africa," Economies, MDPI, vol. 11(6), pages 1-26, May.
    3. Tobignaré Yabré & Gervasio Semedo, 2021. "Political stability and fiscal consolidation in sub‐Saharan African countries," The World Economy, Wiley Blackwell, vol. 44(4), pages 1077-1109, April.
    4. Hüseyin ŞEN & Ayşe KAYA, 2017. "Mali Konsolidasyon Büyüme ve İstihdam için Bir Çıpa mı, Mali Tuzak mı? Teorik ve Ampirik Literatür Temelli Bir Analiz," Sosyoekonomi Journal, Sosyoekonomi Society, issue 25(34).
    5. Wissem Khanfir, 2019. "Keynesian or Non-keynesian Effects of Fiscal Policy Changes: the Case of Tunisia," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 10(1), pages 335-347, March.
    6. Yang, Weonho & Fidrmuc, Jan & Ghosh, Sugata, 2015. "Macroeconomic effects of fiscal adjustment: A tale of two approaches," Journal of International Money and Finance, Elsevier, vol. 57(C), pages 31-60.
    7. Amine Lahiani & Ameni Mtibaa & Foued Gabsi, 2022. "Fiscal Consolidation, Social Sector Expenditures and Twin Deficit Hypothesis: Evidence from Emerging and Middle-Income Countries," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 64(4), pages 710-747, December.
    8. Kleis, Mischa & Moessinger, Marc-Daniel, 2016. "The long-run effect of fiscal consolidation on economic growth: Evidence from quantitative case studies," ZEW Discussion Papers 16-047, ZEW - Leibniz Centre for European Economic Research, revised 2016.
    9. Alberto Botta, 2020. "The short- and long-run inconsistency of the expansionary austerity theory: a post-Keynesian/evolutionist critique," Journal of Evolutionary Economics, Springer, vol. 30(1), pages 143-177, January.
    10. Szilárd Benk & Zoltán M. Jakab, 2012. "Non-Keynesian Effects of Fiscal Consolidation: An Analysis with an Estimated DSGE Model for the Hungarian Economy," OECD Economics Department Working Papers 945, OECD Publishing.
    11. Alari PaulusBy & Francesco Figari & Holly Sutherland, 2017. "The design of fiscal consolidation measures in the European Union: distributional effects and implications for macro-economic recovery," Oxford Economic Papers, Oxford University Press, vol. 69(3), pages 632-654.
    12. Moulaye Bamba & Jean-Louis Combes & Alexandru Minea, 2020. "The effects of fiscal consolidations on the composition of government spending," Applied Economics, Taylor & Francis Journals, vol. 52(14), pages 1517-1532, March.
    13. Philip Arestis & Ayşe Kaya & Hüseyin Şen, 2018. "Does fiscal consolidation promote economic growth and employment? Evidence from the PIIGGS countries," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 15(3), pages 289-312, November.
    14. Vybhavi Balasundharam & Olivier Basdevant & Dalmacio Benicio & Andrew Ceber & Yujin Kim & Luca Mazzone & Hoda Selim & Yongzheng Yang, 2023. "Fiscal Consolidation: Taking Stock of Success Factors, Impact, and Design," IMF Working Papers 2023/063, International Monetary Fund.
    15. Stegarescu, Dan, 2013. "Does expenditure composition influence the debt level? Evidence from German federal states," Discussion Papers 52/2013, Deutsche Bundesbank.
    16. Dante Souza Cardoso & Laura Barbosa de Carvalho, 2023. "Effects of fiscal consolidation on income inequality: narrative evidence from South America," Empirical Economics, Springer, vol. 64(3), pages 1177-1218, March.
    17. Brown, Sarah & Kontonikas, Alexandros & Montagnoli, Alberto & Moro, Mirko & Onnis, Luisanna, 2021. "Life satisfaction and austerity: Expectations and the macroeconomy," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 95(C).
    18. Georgia Kaplanoglou & Vassilis T. Rapanos & Ioanna C. Bardakas, 2015. "Does Fairness Matter for the Success of Fiscal Consolidation?," Kyklos, Wiley Blackwell, vol. 68(2), pages 197-219, May.
    19. Anton Burger & Martin Zagler, 2008. "US growth and budget consolidation in the 1990s: was there a non-Keynesian effect?," International Economics and Economic Policy, Springer, vol. 5(1), pages 225-235, July.
    20. Reicher, Claire, 2014. "Systematic fiscal policy and macroeconomic performance: A critical overview of the literature," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 8, pages 1-37.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jecomi:v:11:y:2023:i:5:p:141-:d:1142246. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.