A scrutiny into fiscal policy in the South African economy: A Bayesian approach with hierarchical priors

Abstract

This study analyses the impact of fiscal policy on the South African economy during the period 1972Q1-2020Q2. The study adopted quarterly time series data to estimate a Bayesian Vector Autoregression (BVAR) model with the selection of hierarchical priors. The variables employed for empirical investigation included GDP, government expenditure, public debt, and gross fixed-capital formation. The results of the study show that an unexpected shock in government expenditure and public debt has a significant negative and persistent impact on economic growth in South Africa, while an unexpected shock in investment has a significant positive effect on economic growth. The findings suggest that escalating public expenditure and public debt lead to economic contraction. This implies that policy-makers ought to be cautious of excessive government expenditure and public debt to achieve fiscal consolidation. Policy-makers ought to focus on addressing structural challenges through the implementation of sound structural reform policies that aim to attract investment consistent with job creation, development and growth in South Africa’s economy.

Keywords:

• BVAR
• economic growth
• government expenditure
• hierarchical priors
• public debts

PUBLIC INTEREST STATEMENT

Similar to the rest of the emerging countries worldwide, the South African democratic government has relied on the theoretical assumption made by John Maynard Keynes, which is well-known as the Keynesian economic paradigm. The Keynesian theory believes that a change by the government in the level of government expenditure and taxation positively influences aggregate demand and then influences economic activities. South Africa has been facing the challenge of sustaining sustainable economic growth. Since 2000, South Africa has been reporting growth rates below 3 percent, implying that the economy has been failing to grow its contribution to the economy towards attaining some of its developmental goals and macroeconomic objectives. In this study, we find that fiscal policy reduces the level of growth in South Africa. While investment was found to be an important driver of growth in South Africa, lastly, our results suggest that a focus on promulgating macroeconomic policies that will attract investment consistent with job creation and economic expansion is needed in South Africa.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The authors received no direct funding for this research

Notes on contributors

Lindokuhle T Zungu

Lindokuhle Talent Zungu is a junior lecturer in the Department of Economics at the University of Zululand. In 2021, he was selected as an Associate Member of the Pan-African Scientific Research Council. In the same year, he received an award for being the best master’s candidate in the Economics department (University of Zululand) by Economic Research Southern Africa (ERSA).

In 2019, because of his being an avid researcher, he was elected to participate in the SA-TIED young scholar programme (South Africa) under the United Nations University-World Institute for Development Economics Research (UNU-WIDER). In 2017, he was appointed as a researcher for Professor Greyling. He is an avid researcher, and his work has been published in accredited journals of economics and also as working papers under the ERSA working paper series. He received his education at the University of Zululand (UNIZULU) with a Master’s in commerce (Economics) and is currently registered for a Doctorate Degree in Economics at UNIZULU. His research interest is in macroeconomics.