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A fiscal rule to produce counter-cyclical fiscal policy in South Africa

Author

Listed:
  • Stan du Plessis

    () (Department of Economics, Stellenbosch University)

  • Willem Boshoff

    () (Department of Economics, Stellenbosch University)

Abstract

This 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.

Suggested Citation

  • Stan du Plessis & Willem Boshoff, 2007. "A fiscal rule to produce counter-cyclical fiscal policy in South Africa," Working Papers 13/2007, Stellenbosch University, Department of Economics.
  • Handle: RePEc:sza:wpaper:wpapers44
    as

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    File URL: https://www.ekon.sun.ac.za/wpapers/2007/wp132007/wp-13-2007.pdf
    File Function: First version, 2007
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Sean J. Gossel & Nicholas Biekpe, 2013. "The Cyclical Relationships Between South Africa's Net Capital Inflows and Fiscal and Monetary Policies," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 49(2), pages 64-83, March.
    2. Aye, Goodness C. & Balcilar, Mehmet & Bosch, Adél & Gupta, Rangan, 2014. "Housing and the business cycle in South Africa," Journal of Policy Modeling, Elsevier, vol. 36(3), pages 471-491.
    3. Estian Calitz & Krige Siebrits & Ian Stuart, 2013. "Enhancing the credibility of fiscal forecasts in South Africa: Is a fiscal council the only way?," Working Papers 25/2013, Stellenbosch University, Department of Economics.
    4. Jean-Louis Combes & Rasmané Ouedraogo, 2014. "Does Pro-cyclical Aid Lead to Pro-cyclical Fiscal Policy? An Empirical Analysis for Sub-Saharan Africa," Working Papers halshs-01084600, HAL.
    5. Victor D. Lledó & Irene Yackovlev & Lucie Gadenne, 2011. "A Tale of Cyclicality, Aid Flows and Debt: Government Spending in Sub-Saharan Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 20(5), pages 823-849, November.
    6. Kibambe Jacques Ngoie & Niek Schoeman, 2009. "Modelling the Impact of Automatic Fiscal Stabilisers on Output Stabilisation in South Africa," Working Papers 129, Economic Research Southern Africa.
    7. Charl Jooste & Marina Marinkov, 2012. "South Africa'S Transition To A Consolidated Budget," South African Journal of Economics, Economic Society of South Africa, vol. 80(2), pages 181-199, June.
    8. Tatiana Lysenko & Geoff Barnard, 2011. "Strengthening the Macroeconomic Policy Framework in South Africa," OECD Economics Department Working Papers 847, OECD Publishing.
    9. Stan Du Plessis & Kevin Kotze, 2012. "Trends and Structural Changes in South African Macroeconomic Volatility," Working Papers 297, Economic Research Southern Africa.
    10. Estian Calitz & Stan du Plessis & Krige Siebrits, 2013. "Fiscal sustainability in South Africa: Will history repeat itself?," Working Papers 07/2013, Stellenbosch University, Department of Economics.
    11. Stan Du plessis & Ben Smit & Federico Sturzenegger, 2007. "The Cyclicality Of Monetary And Fiscal Policy In South Africa Since 1994," South African Journal of Economics, Economic Society of South Africa, vol. 75(3), pages 391-411, September.

    More about this item

    Keywords

    Fiscal policy; Stabilisation policy; Structural budget balance; Fiscal stance; Fiscal rules;

    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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