Fiscal policy and economic growth in South Africa

Purpose – This paper aims to examine the effects of fiscal policy associated with increases in government expenditures, tax revenue and budget deficit on the South African economy. Design/methodology/approach – Structural VARs based on the Blanchard-Quard decomposition identification scheme were used in the empirical analysis. With the aid of quarterly data covering the period 1990:1 to 2008:4, the identified true models are used to estimate various impulse-response functions. The impulse-response functions represent the responses of real output and interest rates to shocks from tax revenue, budget deficit and government consumption and investment expenditures. Findings – The results suggest that the fiscal policy instruments have varied effects on output and interest rates. The effect of the fiscal policy on output appears to be quite modest but persistent; however, the response from interest rate is temporary and substantial most cases. Originality/value – The debate on the efficacy of fiscal policy in stimulating growth seems to have assumed new prominence in the wake of the recent global financial crisis. This paper contributes to the discourse from a South African focused empirical effort. Other fiscal policy authorities may find the paper valuable.