A fiscal rule to produce counter-cyclical fiscal policy in South Africa
AbstractThis paper considers the role of fiscal policy as a component of stabilisation policy in South Africa. The South African economy – like many others, most notably the United States – has experienced considerable economic stability over the last decade. At stake in this paper is whether fiscal policy had intentionally or unintentionally contributed to this favourable outcome. A number of techniques are used to investigate the cyclicality of fiscal outcomes since the early 1990s in South Africa and the evidence does not support claims that South African fiscal policy had been pro-cyclical (and hence destabilising) overt this period. But to prevent potential fiscal pro-cyclicality from becoming a reality in South Africa a package of reforms is derived that is consistent with the empirical evidence presented. The recommended reform includes: firstly, a fiscal rule that includes the following features: a numerical limit on the ratio of government expenditure to GDP and a commitment to a balanced budget (adjusted for the economic cycle), which would allow automatic revenue stabilisers to ensure a counter-cyclical policy. Secondly, a procedural rule that requires an independent business cycle commission to calculate potential GDP, the output gap and the adjustments required to calculate the structural budget balance. This depoliticised commission will enhance fiscal transparency and prevent the temptation by fiscal authorities to adjust these estimates, which have undermined some fiscal rules in practice.
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Bibliographic InfoPaper provided by Stellenbosch University, Department of Economics in its series Working Papers with number 13/2007.
Date of creation: 2007
Date of revision:
Fiscal policy; Stabilisation policy; Structural budget balance; Fiscal stance; Fiscal rules;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
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