The significance of automatic fiscal stabilisers in South Africa

Abstract

When setting and monitoring fiscal targets, there is a need to take explicit account of the cyclical position of the economy and its effect on the budget. Most of the discussion on fiscal policy in South Africa deals only with long-term sustainability issues, largely ignoring the effects of the economic cycle. As a result, serious policy mistakes can occur if purely cyclical improvements in the public finances are treated as if they represent structural improvements, or if structural deterioration is interpreted as a cyclical effect. This study considers the countercyclical role of South African fiscal policy during the period 1970 to 2000. More specifically, it presents theoretical and empirical analysis of the significance of automatic fiscal stabilisers in the South African economy and calculates the cyclically adjusted budget balance that can improve fiscal policy-making and analysis. The study compares results for South Africa with six other developing countries (Chile, Mexico, Indonesia, India, Mauritius and Romania) and macroeconomic stabilisation and the potential role of automatic fiscal stabilisers in the New Partnership for Africa’s Development (NEPAD) are also investigated. This study highlights the need for continued caution in the use of discretionary policy, greater focus on making automatic fiscal stabilisers more effective in South Africa and the integration of better measures of fiscal balance into the discretionary policy process. Automatic fiscal stabilisers could also play an important role as a complement to countercyclical monetary policy and the operation of monetary policy could be facilitated by the predictable and automatic responses from automatic fiscal stabilisers. Budget rules could play an important role in developing countries and specifically in African countries. If applied flexibly, fiscal rules could be regarded as restoring at least a moderate countercyclical role in these countries through the operation of automatic fiscal stabilisers. Although automatic fiscal stabilisers are likely to be less important in African countries due to structural reasons, the combination of appropriate rules, taking into account the impact of the business cycle on the public finances and vigilance against the dangers of inappropriate discretionary policy, may make a valuable contribution to Africa’s development.