Revisiting the Effectiveness of Fiscal Policy on Economic Growth in South Africa: A Markov Switching Means VAR Approach

This study examines the effectiveness of fiscal policy on economic growth in South Africa, aiming to identify transitions between economic states and assess the impact of key fiscal policy instruments on economic growth using a Markov Switching Means VAR (MSM-VAR) approach. This study covers the period 1994Q1 to 2024Q1. There are two economic regimes identified in the study: economic expansion (Regime 1) and economic recession (Regime 2). The analysis considers fiscal variables such as tax revenue, gross fixed capital formation, government expenditure, government deficit, and government debt. Results indicate that fiscal policy affects economic growth depending on the economic environment. In Regime 1, government expenditure and government deficits have a positive impact on economic growth, while tax revenues and government debt have a negative impact. However, in Regime 2, tax revenues and government deficits have a positive impact on economic growth, while government expenditure and government debt have a negative impact. Other results show that in both regimes, gross fixed capital formation has a positive impact on economic growth. Therefore, policymakers should consider current economic conditions when implementing fiscal policy instruments to maximize their impact on economic growth. These findings highlight the importance of tailoring fiscal policy measures to suit the specific economic regime.