Abstract:
As actual budget balances reflect both cyclical developments and discretionary
measures, they are not very useful when seeking to assess the orientation of
underlying fiscal policy and possible structural imbalances in the budget
balance. The influence of fluctuations in economic growth on the government’s
budget balance can be examined by decomposing the actual budget into a
cyclical and a structural or cyclically adjusted component. The former
component shows the effect on the government budget of cyclical fluctuations in
economic activity, the latter reflects what the budget balance would be if
economic activity were at its trend level. This paper calculates the extent to
which fiscal policy stabilises output fluctuations in South Africa and estimates
the cyclically adjusted budget balance of the consolidated general government as
an alternative fiscal indicator that can contribute to more effective fiscal policy
and fiscal analysis.
