The sustainability of South African fiscal policy: an historical perspective

Abstract

This article examines the issue of long-run fiscal sustainability in South Africa by applying a battery of recently developed unit root and cointegration tests to real revenue and spending data for the period 1895 to 2005. The results provide evidence that, allowing for structural breaks, South African revenue and spending during this period were I(1) series and cointegrated, with the estimated long-run equilibrium relation supporting the presence of a weak deficit sustainability condition.

† The views expressed in this article are those of the authors and should not be attributed to the International Monetary Fund.

Notes

† The views expressed in this article are those of the authors and should not be attributed to the International Monetary Fund.

¹ Afonso (2005) provides a comprehensive discussion of the time series issues involved and a survey of many of the associated empirical studies.

² Perron (2006) provides an excellent survey of unit root and cointegration tests in the presence of structural changes.

³ For example, of the 33 studies on the issue surveyed by Afonso (2005), only five incorporate data prior to 1945 and most of the remaining studies used annual data, for which the mean number of observations was about 35.

⁴ Kalyoncu (2005) and Ghatak and Sánchez-Fung (2007) are among the minority of studies that have looked at the experience of developing and emerging market economies, though these authors report results from data series that begin only in 1970.

⁵ The data are from Mitchell (2003) and the International Monetary Fund's International Financial Statistics dataset.

⁶ While the year 1973, as also determined in the Gregory–Hansen test, captures the oil crisis, the period 1968/75 was generally characterized as the one of substantial fiscal expansion (Browne, 1986).

⁷ We are grateful to a referee for suggesting these checks.

⁸ The results are available from the authors upon request.

⁹ While alternative dummy variables have also been tested, the following discussion is based on the model which includes only 1973 dummy. The complete set of results is available from the authors upon request.