Alternative definitions of the budget deficit and its impact on the sustainability of fiscal policy in South Africa

Abstract

This paper investigates the usefulness of different definitions of the budget deficit and their impact on fiscal sustainability. The analysis shows that a number of alternative definitions of the budget deficit are useful, some even extremely useful, for analyzing the impact of fiscal policies. The choice among the alternatives depends mainly on the purpose for which it is intended. However, despite the usefulness of the different definitions of the deficit, their order of magnitude in South Africa differs only marginally from that of the operational deficit. In our analysis of fiscal sustainability, the full range of possibilities have been accommodated in the different scenarios with the operational deficit. With a finite time horizon medium term current fiscal policy can be said to be sustainable or intertemporaly consistent, if it is able to achieve a given target level of the debt/GDP ratio. Unlike the infinite time horizon case, this target level might be nonzero. In this paper the latter case has been investigated. Three possible alternatives were tested and the results indicate that there is little room for fiscal maneuverability in South Africa without jeopardizing fiscal discipline policies. In the longer term, different definitions of the budget balance do not change this reality.