# **_Fiscal policy intentions: Accidental or intentional?_**

Did the South African government pursue procyclical policy accidentally or on purpose? Assuming two objective functions, we construct measures of intentions that we call consistency: meaning the government achieves its intended outcomes. We define these objectives as (i) the government attempting to stabilize the economy and (ii) the government attempting to run sustainable fiscal policy. We collect a data set using various Budget Reviews (starting in 1998) and analyze text related to a set of words that are related to these objectives. We build indices of these words (normalized by the total number of words in each document), which we then evaluate with outcomes (correlations to the budget deficit and to the output gap). Our correlations are referred to as consistency measures, i.e. capturing whether a government achieves its stated policy objectives.

The words are related to statements regarding _stabilizing the economy, smoothing out business cycles_ , and _countercyclical fiscal policy_ .

We create two measures of consistency.

1. One where the government announces that it will aim to smooth the business cycles compared to movements in the actual business cycles. The word frequencies related to business cycle stabilization are correlated with the inverse of the output gap �Consistency�

- ����������,�<sup>�∗</sup> � �� �<sup>~~∗~~</sup> . A positive correlation implies that the government follows through on its

- �<sup>�����</sup> � � �

statements, i.e. that statements of stabilizing the economy are followed through by a stabilizing event. To this end we have an illustration of consistent demand management policies.

2. The second measure correlates the word frequencies related to the stance of the government to actual changes in the budget balance. This measure is perhaps more important than the first measure given the direct control that the fiscal authorities have on setting budget targets. As an example, words related to stimulus and the deficit are measured as: Consistency�,� � ����������,∆����� ~~,~~ or consolidation: Consistency� ����������,∆����� ~~.~~ If the government �<sup>�����</sup> �<sup>∆����</sup> �<sup>�����</sup> �<sup>∆����</sup> announces a period of expansion or consolidation and the actual budget balance follows those announcements, then policy is consistent.

Consistency� will naturally fluctuate between -1 and 1. If Consistency� �0 during a consolidation effort, then the government does what it says – where once again, consistency is the intent of government measured against outcomes.

If the government is countercyclical, then it is possible that both objectives can be met and hence they should consequently co-move. **A procyclical stance would imply competing objectives where one would for example emphasize output maximization policies over a stable budget** . Note here that maximization of output is not stabilization of output – here again one could see how a government can prolong a business cycle.

Figure 10 plots the frequency of words related to consistency of the _budget_ and _output stabilization_ . It is interesting to note that _budget_ and _output stabilization_ are almost inversely related to each other during 2011-2015: During the financial crisis (2008/2009) there was an emphasis on using countercyclical fiscal policy to stimulate the economy, however in the years since 2013 the Budget has focused its efforts on terms related to _output_ consistency but at the expense of foregoing countercyclical policy. An obvious caveat is the limited number of words in each Budget Review related to these objectives. It is striking that little space is devoted to discussing budget stabilization policies.

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