‘Fiscal space’ is the financial buffer a government keeps in reserve to handle unexpected economic shocks. To see how this buffer has been managed, we calculated the cyclical fiscal stance—the main budget balance adjusted for how the business cycle naturally affects tax revenue and spending. Using National Treasury data available at the time of each budget publication, we estimate these cyclical components.
The results show that fiscal policy became significantly less prudent (running larger structural deficits) after the 2008 Global Financial Crisis (GFC). Before the GFC, fiscal policy was reliably counter-cyclical: the government built up cushions during good times and spent during bad times. Post-GFC, however, fiscal policy remained stimulative, even as the economy’s output gap narrowed to near zero.
For comparison, the blue line shows the IMF’s latest estimate of the cyclically adjusted primary balance. It reveals that the fiscal stance was actually much looser between 2009 and 2020 than standard statistical models suggest.
Footnotes
This post looks 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 to evaluate how data revisions affect these assessments.
