Countercyclical fiscal policy in South Africa : role and impact of automatic fiscal stabilisers

As actual budget balances reflect both cyclical developments and discretionary measures, they are not very useful when seeking to assess the orientation of underlying fiscal policy and possible structural imbalances in the budget balance. The influence of fluctuations in economic growth on the government’s budget balance can be examined by decomposing the actual budget into a cyclical and a structural or cyclically adjusted component. The former component shows the effect on the government budget of cyclical fluctuations in economic activity, the latter reflects what the budget balance would be if economic activity were at its trend level. This paper calculates the extent to which fiscal policy stabilises output fluctuations in South Africa and estimates the cyclically adjusted budget balance of the consolidated general government as an alternative fiscal indicator that can contribute to more effective fiscal policy and fiscal analysis

The benefit of aligning South Africa’s personal income tax thresholds and brackets with that of its peers using a micro-simulation tax model

BACKGROUND : This article is based on a PhD study in which a microsimulation (MS) tax model was constructed to measure the revenue and tax efficiency effects of adjustments to marginal tax rates on individual income. AIM : The main aim with this analysis is to determine the advantages of adjustments to the thresholds and taxable income brackets in SA on revenue collected, tax efficiency, and progressivity as part of a broader tax reform effort. SETTING : Currently such changes mainly consist of adjustments to tax brackets and thresholds to account for inflation, although since the 2017/2018 budget, such adjustments have been minimised as a result of the widening in the budget deficit. METHODS : The tax brackets and thresholds for the 2005/2006 fiscal year are used as a base from which changes are implemented. Besides the base scenario, two other scenarios are simulated, based on that of South Africa’s peers (lower levels). Simulations are done with the MS tax model. RESULTS : The research shows that instead of only allowing for inflation adjustments, the alignment of income brackets and thresholds to levels closer to those of South Africa’s peers could be beneficial with an improvement in the efficiency of the income tax regime. More individuals could be included into the tax net, albeit at (on average) lower tax scales resulting in a marginal loss in revenue. Although such an adjustment could be interpreted as being more regressive and, therefore, negative from a ‘tax fairness’ perspective, the Personal Income Tax (PIT) burden expressed as the PIT and Gross Domestic Product (GDP) ratio would be slightly lower. CONCLUSION : The possible result would be an improvement in tax liability and economic growth which could in turn fuel personal income and, therefore, revenue collected from this important tax source. This would compensate for the initial loss in PIT.http://www.sajems.orgam2019Economic

Fiscal regime changes and the sustainability of fiscal imbalance in South Africa : a smooth transition error-correction approach

In addition to the conventional linear cointegration test, this paper tests the asymmetry relationship between fiscal revenue and expenditure, by making a distinction between the adjustment of positive (budget surplus) and negative (budget deficit) deviations from equilibrium. The analysis uses quarterly data for South Africa. The paper reveals that government authorities in South Africa are more likely to react more quickly when the budget is in deficit than when in surplus, and that the stabilisation measures used by government are fairly neutral at low deficit levels; that is, at deficit levels of 4 per cent of GDP and below. We conclude that the assumption that adjustment towards equilibrium is always present and of the same strength under all circumstances, is not valid in the case of fiscal data on South Africa; and that that fiscal sustainability in South Africa has been attained at the expense of a reduction in the ratio of expenditure to GDP on education, and a relatively constant ratio of expenditure to GDP on health. The paper noted that a priori one would expect that such a decline in the allocations to sectors which could stimulate growth and which in turn could generate future revenue, may pose a threat to the accumulated fiscal space. In South Africa the main fiscal challenge, therefore, is to find ways through which the recent gains in fiscal solvency can be consolidated.http://www.sajems.org/index.php/sajemsnf201

Fiscal regime changes and the sustainability of fiscal imbalance in South Africa : a smooth transition error-correction approach

In addition to the conventional linear cointegration test, this paper tests the asymmetry relationship between fiscal revenue and expenditure, by making a distinction between the adjustment of positive (budget surplus) and negative (budget deficit) deviations from equilibrium. The analysis uses quarterly data for South Africa. The paper reveals that government authorities in South Africa are more likely to react more quickly when the budget is in deficit than when in surplus, and that the stabilisation measures used by government are fairly neutral at low deficit levels; that is, at deficit levels of 4 per cent of GDP and below. We conclude that the assumption that adjustment towards equilibrium is always present and of the same strength under all circumstances, is not valid in the case of fiscal data on South Africa; and that that fiscal sustainability in South Africa has been attained at the expense of a reduction in the ratio of expenditure to GDP on education, and a relatively constant ratio of expenditure to GDP on health. The paper noted that a priori one would expect that such a decline in the allocations to sectors which could stimulate growth and which in turn could generate future revenue, may pose a threat to the accumulated fiscal space. In South Africa the main fiscal challenge, therefore, is to find ways through which the recent gains in fiscal solvency can be consolidated.http://www.sajems.org/index.php/sajemsnf201

The nonparametric relationship between oil and South African agricultural prices

The aim of this paper is to investigate the causal relationship between agricultural prices in South Africa and global oil prices. A nonlinear Granger causality test based on moment conditions, introduced by Nishiyama et al. (2011) is employed and we find that there is indeed a causal relationship between global oil prices (OPEC basket (sourced from OPEC) and Brent Crude (sourced from the Fred database of the Federal Reserve Bank of St. Louis)) and certain South African agricultural commodity prices (sourced from Johannesburg Stock Exchange) over the period of 2003-2014 using daily data. The mean price of wheat, sunflower and soya are Granger caused by OPEC basket oil price. OPEC basket oil prices also cause volatility of wheat, sunflower seed and sorghum prices.Lo scopo di questo studio è analizzare la relazione causale tra il prezzo del petrolio a livello mondiale e i prezzi dei prodotti agricoli in Sud Africa. Viene utilizzato il test di nonlinearità di Granger causality (ideato da Nishiyama et al., 2011) basato su condizioni di momento. I risultati indicano che effettivamente c’è una relazione causale tra i prezzi del petrolio (paniere OPEC), il prezzo Crude Brent (banca dati Federal Reserve Bank of St. Louis) e i prezzi di alcuni prodotti agricoli del Sud Africa (fonte: Borsa di Johannesburg) nel periodo 2003-2014, con utilizzo di dati giornalieri. Il prezzo medio della farina, girasole e soia sono Granger causati dal prezzo del petrolio del paniere OPEC. Quest’ultimo è causa anche della volatilità dei prezzi della farina, dei semi di girasole e del sorgo.http://www.iei1946.it/en/rivista.phphttp://www.ge.camcom.gov.it/IT/Page/t01/view_html?idp=555am2017Economic

Rethinking fiscal decentralization in South Africa

This article seeks to analyse the fiscal sustainability of municipalities in South Africa in view of increasing protests about the poor level of service delivery – especially in the smaller municipalities. International evidence also reflects disappointment with the classical view that government closer to people addresses the allocation problem more effectively with the lower spheres of government more accountable to the residents. The lack of “hard budget constraints” with revenue support in the form of grants and subsidies causes fiscal prudence to be eroded and in many instances local fiscal objectives are not aligned with that of the national government. Of crucial importance is the sustainability of the finances of the municipalities and this article identifies criteria with which sustainability at the local government sphere can be quantified. Two distinct dimensions are discussed, namely a static dimension as well as a dynamic dimension where the impact of changes in income and expenditures on debt ratios is measured. The results show that if grants and subsidies be deducted from revenue, most municipalities will not survive financially. In many instances revenue is only collected after a long lag if collected at all. Municipalities’ debt is increasing and backlogs in the expansion and maintenance of infrastructure are widening. The research results tend to support the view that government should carefully re-evaluate the number of municipalities allowed to manage their own budgets and that more stringent financial reporting be enforced.http://www.saapam.co.za

Economic growth and development constraints in Africa

The slowing growth throughout the world over the past number of quarters has been uncomfortable for advanced countries, but a real source of hardship to many developing countries and a real setback to the fight against world poverty. These developments underscore the need for an integrated concept for answering critical questions about globalisation and the difficulties of specifically African countries to share in the concomitant generation of wealth. NEPAD has to do just that. Success in the fight against poverty is the key to stability and peace in the twenty first century and nowhere is the battle lines clearer than in Africa. This process will require innovative thought from both government and the private sector. Economic growth does not simply equate human progress. Hence the long and central debate as to what, seemingly in conflict, contributes to economic efficiency and what to distributive justice. This debate confounds national economic policy response to our vast poverty and all too common human degradation. It appears as if the latter problem is missing in the core economic assumptions on which the New Partnership for Africa's Development (NEPAD) rests. The country cannot afford to have unrest caused by growing tension between the demands of the constitution that defines human dignity as the prime task of the state, and the need for disciplined economic policies that would ensure foreign direct investment and competitiveness in the foreign markets. The embarkation on this high road faces many constraints, mostly on the supply side of the economy. The economy responds growth-wise more favorably to policy approaches that directly address supply-side constraints (e.g. decreases in unskilled real wages, improvements in education, and human development levels and FDI), than to demand-side expansions. The demand-driven policy approaches (such as increases in government expenditure and exports), seem to encounter supply constraints at the four to five percent growth level. There against increased investment in human skills and foreign direct investment, easily raise economic growth to levels above six per cent. Thus, a balanced approach is necessary with well-targeted government expenditures aimed at increasing investment in human capital, research and development, and productivity. In what follows a number of macro issues that require urgent attention are discussed

Tax revenue as an automatic fiscal stabiliser - a South African perspective

The many practical economic and political difficulties encountered in discretionary fiscal stabilisation policy highlight the potential benefits of allowing automatic fiscal stabilisers to operate over the cycle. This article investigates the relevance of tax revenue as an automatic fiscal stabiliser in the South African economy by an empirical analysis of its role and impact since the 1970s. The study finds that cyclical changes in tax revenue are relatively small and provide no significant evidence of automatic stabilisation; however, the potential of this tool as an effective automatic fiscal stabiliser in South Africa cannot be overlooked as results show a high correlation between the output gap and automatic stabiliser estimates. Automatic fiscal stabilisers were employed symmetrically over the cycle and results showed that automatic fiscal stabilisers became increasingly important towards the end of the sample period

The fiscal impact of unemployment insurance programmes as automatic stabilisers : the South African experience

Theoretically, unemployment insurance (UI) contributions and benefits act in tandem to serve as counterbalances to the direction of the economy. Government transfers to households to cover costs related to unemployment are usually the principal source of automatic fluctuation in government expenditure. This article investigates the interaction between such transfers and economic performance with the South African economy as a case study. The main finding is that UI contributions destabilised economic activity most of the time, but that the stabilising effect resulting from UI benefits was sufficient to offset these destabilising effects so that the UI balance acted as an automatic fiscal stabiliser over the period 1970 to 2000. The article points out that although UI benefits demonstrate countercyclical properties, the same could not be said with confidence about other components of general government expenditure in South Africa. Furthermore, the stabilising effect of the South African Unemployment Insurance Fund can be expected to be relatively insignificant due to its small share in the total public finances. However, the possible psychological benefits of the UI system and the evidence provided in this paper emphasise the potential of the Unemployment Insurance Fund as an effective automatic fiscal stabiliser also in South Africa

Leadership towards a just economic society : words on leadership

This actuality article on leadership argues for the need to move towards a just economic society. The implications of different terms are considered within a conceptual framework. This framework is essential for a better understanding of economic justice in an institutional environment, where economic relationships and economic justice has come to dominate public debate. The relations between public opinion and material wealth are analysed before justice in a mixed economy receives attention. Related conditions are discussed in succession, firstly, individual Freedom and the Rule of Law, and secondly, distributive justice. The article then proceeds to discuss challenges for economic leadership in South Africa, indicating trends present in both the theoretical and political leadership current in the rest of the world. Perspective is thereby given on the situation in South African democracy, where the political focus has moved from the issue of justice as freedom, to justice in the distribution of wealth and income.http://explore.up.ac.za/record=b152516