The effects of fiscal policy on economic growth in South Africa.

Abstract

The question of whether fiscal policy influences economic growth has dominated the theoretical and empirical debates for a very long time. One viewpoint, the Keynesians, believe that government’s involvement in economic activity is vital for economic growth, whereas the opposing view of the Classical economist’s holds that government operations are inherently bureaucratic and inefficient and therefore, impede, rather than promote growth. Empirical literature results show a positive relationship between fiscal policy and economic growth; however, some cases do have conflicting results. The aim of this research was to add to the fiscal policy-growth literature by examining the effects of fiscal policy in South Africa as a developing country. South Africa experienced slow but steady economic growth between 1994 and 2009 and an average GDP growth rate of 2,93 percent from 1993 until 2016. Due to the low growth rate, the country has one of the highest unemployment rates in the world, having recorded an unemployment rate of 27.7 percent in the first quarter of 2017, as per Stats South Africa. This study therefore intended to examine the South African fiscal policy experience between 2013 and 2017. The study examined each of the three fiscal policy variables (government spending, tax revenues and budget deficits) and their impact on the economic growth of developing countries, mostly in Africa. Macro-economic time series data which ranged from 2013 to 2017 was used in the application of the SVAR model. The necessary steps needed to make sure that the time series were stationary and appropriate for the SVAR model were taken. From the FEVD and IRF analysis, the null hypothesis was demeaned. The main objectives of the study were to identify whether fiscal policy has a positive or negative contribution to the economic growth of South Africa. Secondly, the study sought to identify which variable of fiscal policy, if any, is most effective when the government seeks to grow the economy. The results of the study indicated that fiscal policy had a zero impact on the economic growth of an economy. In other words, fiscal policy measures are not effective in effecting economic growth to the economy of South Africa. The study also found no variable to be most effective when the government seeks to grow the economy.