Impact of fiscal consolidation on domestic government debt in South Africa 1979 to 2022.
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Date
2023
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Abstract
This study delves into the intricate dynamics of fiscal consolidation and its ramifications on
government debt and economic growth within the context of South Africa. Employing a variety
of methodologies and frameworks, it scrutinizes the efficacy of fiscal policy measures in curbing
government debt while stimulating economic growth. Fiscal consolidation, characterized by cuts
in government expenditures and tax increases, aims to alleviate debt burdens by reducing interest
rates and fostering economic expansion. However, existing measures such as the Cyclical
Adjusted Primary Balance (CAPB) face limitations in capturing the nuanced variations in fiscal
policy effectiveness and thresholds. Addressing these shortcomings, this study utilizes innovative
approaches including Time-Varying Parameter Structural Vector Auto-Regression (TVP-VAR),
Threshold Autoregressive Regime (TAR), Markov-switching dynamic regression (MSDR), and
Two-Stage Least Squares (2SLS) models.
Key findings reveal significant fluctuations in CAPB elasticity over time, highlighting the need
for dynamic measures in assessing fiscal policy impact. Thresholds identified through TAR deviate
from conventional benchmarks, underscoring the importance of context-specific thresholds
in fiscal planning. MSDR analysis uncovers distinct states of government debt, each eliciting
varied responses to fiscal consolidation measures. Notably, while fiscal consolidation proves effective
in debt reduction under certain conditions, its impact on economic growth appears nuanced.
Policy implications highlight the importance of tailored fiscal policies aligned with South Africa’s
economic. By discerning the intricate interplay between fiscal consolidation, government debt,
and economic growth, policymakers can devise more targeted strategies to navigate prevailing
challenges. This study advocates for a nuanced approach to fiscal consolidation, emphasizing
the need for context-specific thresholds and dynamic measures to foster sustainable economic
growth while mitigating debt burdens.
Description
Doctoral Degree. University of KwaZulu-Natal, Pietermaritzburg.