Fiscal expenditures, revenues and labour productivity in South Africa

Abstract

The COVID-19 pandemic emerged at a time when the South African economy was already battling to recover from the aftermath of the global financial crisis of 2007–09 which led the country to experience a decade-old slowdown in labour productivity. Our study investigates the role which government plays in influencing labour productivity by estimating a log-linearized growth model augmented with a fiscal sector using the autoregressive distributive lag model applied to annual data of 1990–2020. We further disaggregate the composition of government size into seven expenditure items and six revenue items, and find i) education, health, recreation and public safety to be expenditure items most beneficial to short-run and long-run labour productivity ii) income taxes and VAT to be revenue items most beneficial to long-run productivity and yet most taxes have adverse short-run effects. The policy implications of the study are discussed.

Keywords:

• public expenditure
• fiscal revenues
• labour productivity
• ARDL
• South Africa

PUBLIC INTEREST STATEMENT

Labour productivity is the amount of output which can be produced by each labourer and is considered an encompassing measure of welfare for economists. For instance, businesses are interested in increasing labour productivity as it has the potential to lower costs and increase profits. On the other hand, improved productivity could translate to higher wages and improved working conditions for labours whilst governments consider labour productivity as key to long-term job creation. Notably, South Africa has had poor labour productivity performance since her democratic transition in 1994 and this has worsened since the 2007-2008 global financial crisis. Our paper investigates the extent to which fiscal policy instruments such as taxes and expenditures can play a role in improving labour productivity in South Africa and by taking a disaggregated approach in our empirical analysis, we able to identify the individual tax and revenue items which either distort or improve labour productivity.

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

Andrew Phiri

Andrew Phiri, who is the corresponding author of the manuscript, is an associate professor with the department of economics at Nelson Mandela University, South Africa. He enjoys a wide range of publications with research interests mainly in macroeconomics, applied econometrics and financial economics.

Chuma Mbaleki

Chuma Mbaleki is a post-graduate student at the department of economics at Nelson Mandela University and is the first author of the article. His research interests are in public economics and applied econometrics.