‘Fiscal space’ refers to the extent to which there remains fiscal resources for fiscal policy to respond to unexpected shocks. The chart below calculates an indicator of the cyclical fiscal stance (i.e. the main budget fiscal balance adjusted for the impact of the business cycle on revenue and expenditure). Using the Treasury’s projections, I also construct a projection of the cyclical component of expenditure and taxes. The measure suggests that the fiscal stance became less prudent (i.e. more negative) after the Global Financial Crisis (GFC). Whereas fiscal policy was broadly counter-cyclical ahead of the GFC (with the output gap and fiscal stance having the same signs and the fiscal stance being more positive than the output gap), post-GFC fiscal policy eased and remained somewhat easy even as the output gap has narrowed to close to zero.
The IMF measure 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. In large part, the downward shift in the latest estimates reflect revisions to the output gap, given weak recent GDP outturns.
Footnote
In this earlier post, I assessed the impact of data revisions on this analysis showing that the decline in trend growth and large recent GDP revisions have made it difficult to assess fiscal space over the last several years. See that post for more methodological detail. This post looked at the real-time properties of output gap estimates.
The data used is from EconData, which provides historical vintages of South African macroeconomic and Budget Review data.