Government budget deficits in South Africa.

Abstract

The Government of National Unity, on coming into power in April 1994, indicated its intention to transform the economy through a growth-oriented reconstruction and development programme (RDP). The sustainability of the RDP, however, depends crucially on the maintenance of fiscal discipline as well as the progressive reduction of the overall fiscal deficit. Excessive fiscal deficits will result in higher inflation, higher real interest rates, balance of payments disequilibrium and lower economic growth, thereby putting the whole RDP at risk (Kusi and Fuzile, 1996). The· need to understand the problems of the fiscal deficit and its underlying causes cannot be overemphasised. This study investigates the trend of the fiscal deficit in South Africa over the period 1960-1994, and the impact on it of the changes in its macroeconomic determinants. Our results show that the fiscal deficit has undergone a general trend increase. Many of the changes in the fiscal deficit were the result of the increased government debt and the associated cost of servicing the debt. Other significant factors that affected the deficit were the costs of capital goods imports, changes in domestic prices and the real exchange rate. Revenue was mostly affected by GDP growth and private consumption expenditures. Our findings suggest that tax reform should be directed at broadening the tax base, while expenditure needs to be reallocated from non-productive activities to productive activities, In reducing the level of government expenditure, the Government needs to focus on the current size of the public debt with a view to cutting it to a manageable level.