To assess the stance of fiscal policy over time, I estimate South Africa’s ‘fiscal space’, which refers to the extent to which there remains fiscal resources for fiscal policy to respond to unexpected shocks. A useful indicator is the cyclical fiscal stance, that is, the main budget fiscal balance adjusted for the impact of the business cycle on revenue and expenditure. The measure suggests that the fiscal stance became less prudent (i.e. more negative) after the GFC of 2008/9. Whereas fiscal policy was broadly counter-cyclical ahead of the GFC, post-GFC fiscal policy eased and remained somewhat easy even as excess capacity (what economists call the ‘output gap’) has narrowed to close to zero.
The IMF measure of the cyclical stance of fiscal policy for South Africa has remained in negative territory since 2009, implying that fiscal policy has stayed ‘loose’ even as the economy began to recover after the GFC and the output gap gradually closed ahead of the COVID-19 crisis. Looking ahead, the IMF assumes fiscal policy will become less stimulative but a cyclically adjusted primary surplus will only be achieved in 2026/27. However, the IMF predicts that South Africa’s structural budget balance will deteriorate over the next 5 years, reflecting the impact of growing debt service costs from rising public debt.
Contrary to claims that South Africa has experienced fiscal austerity, these estimates suggest that fiscal policy has remained loose despite lower growth.
