Impact of fiscal consolidation on domestic government debt in South Africa 1979 to 2022.

Abstract

This study delves into the intricate dynamics of fiscal consolidation and its ramifications on government debt and economic growth within the context of South Africa. Employing a variety of methodologies and frameworks, it scrutinizes the efficacy of fiscal policy measures in curbing government debt while stimulating economic growth. Fiscal consolidation, characterized by cuts in government expenditures and tax increases, aims to alleviate debt burdens by reducing interest rates and fostering economic expansion. However, existing measures such as the Cyclical Adjusted Primary Balance (CAPB) face limitations in capturing the nuanced variations in fiscal policy effectiveness and thresholds. Addressing these shortcomings, this study utilizes innovative approaches including Time-Varying Parameter Structural Vector Auto-Regression (TVP-VAR), Threshold Autoregressive Regime (TAR), Markov-switching dynamic regression (MSDR), and Two-Stage Least Squares (2SLS) models. Key findings reveal significant fluctuations in CAPB elasticity over time, highlighting the need for dynamic measures in assessing fiscal policy impact. Thresholds identified through TAR deviate from conventional benchmarks, underscoring the importance of context-specific thresholds in fiscal planning. MSDR analysis uncovers distinct states of government debt, each eliciting varied responses to fiscal consolidation measures. Notably, while fiscal consolidation proves effective in debt reduction under certain conditions, its impact on economic growth appears nuanced. Policy implications highlight the importance of tailored fiscal policies aligned with South Africa’s economic. By discerning the intricate interplay between fiscal consolidation, government debt, and economic growth, policymakers can devise more targeted strategies to navigate prevailing challenges. This study advocates for a nuanced approach to fiscal consolidation, emphasizing the need for context-specific thresholds and dynamic measures to foster sustainable economic growth while mitigating debt burdens.