# 4. Fiscal policy and _the cycle is the trend_ in South Africa

Since democracy in South Africa in 1994, three distinct phases characterized fiscal policy. The end of Apartheid heralded a period of debt repayments. South Africa repaid legacy debt to external creditors and pursued consolidated fiscal accounts. In its annual budgets following the transition to democracy in 1994, it identified fiscal consolidation as the country’s main fiscal policy objective – a continuation of the fiscal policy objective from 1992 (National Treasury, Budget Reviews 1994 - 1997). In a context of inherited national debt amounting to 48.7% of GDP, together with weak revenue collection, the government identified the need to reduce the budget deficit and government dissaving (borrowing), moderate government consumption expenditure as a share of GDP, and avoid a permanent increase in the tax burden as its main fiscal policy goals (Budget Reviews 1994 – 1998). The government affirmed this policy stance over the subsequent years until 2001 (Budget Reviews 1999 – 2000). From 1998 onwards a more pronounced emphasis on fiscal sustainability, and an attempt to link expenditure growth to economic growth can be observed. By the 1999 Budget, following poor economic growth in the previous year, the government deferred its fiscal deficit target – an early case of fiscal responsiveness to economic performance.

From 2001, the government stated its intention to shift towards an expansionary fiscal policy stance to support the economy, investment and social spending. It noted that the fiscal consolidation of the previous years (1994 – 2000) provided the basis upon which to embrace its expansionary fiscal policy stance. South Africa reduced gross debt from 41% of GDP in 2001 to 26% of GDP in 2009 by running primary surpluses and acquired favorable credit ratings (Figure 7). This period also coincided with real commodity price increases, which benefited commodity trade. GDP growth was on an upward path, which together with an improvement in tax collection methods led to increase in revenues. Sustained strong growth over this period seemed like a permanent shift in GDP. This period also saw a permanent shift in revenues, which allowed for sustained real growth in expenditure. Public expenditure<sup>2</sup> increased from 24.4% of GDP in 2001/2002 to 24.9% of GDP in 2007/2008, while revenues<sup>3</sup> increased from 23% of GDP in 2001/2002 to 25.9% in 2007/2008 (Budget Reviews). Both revenues and expenditures outpaced nominal GDP growth, reflecting a wider tax base, profitable institutions, higher returns to factor inputs, and most likely spill-overs from commodity prices.

It was only in 2007 that the government identified the relationship between its fiscal policy stance and the economic cycle through the introduction of the concept of a cyclically-adjusted budget balance in its 2007 medium-term budget (MTBPS 2007, Budget Review 2007). In 2009, as the country experienced the effects of the global financial crisis, the government retrospectively referred to its fiscal policy stance over the previous period (since 2001) as countercyclical, and explicitly committed itself to a countercyclical fiscal policy. In subsequent budgets, the government affirmed its counter-cyclical fiscal policy stance, and stated its objective of counteracting variations in the business cycle and supporting growth through public spending. It identified countercyclicality as one of the principles underlying fiscal policy in South Africa (Budget Reviews 2008 – 2014). The fiscal policy response during this period seemed standard and appropriately countercyclical with a combination of automatic stabilizers acting together with discretionary fiscal measures to stabilize, or spur on demand during what was likely to be its longest downward phase of the economic cycle. The economic response was muted and consequently left the government with a sizable debt burden with high interest repayments, and possibly lower long-run growth.

2 Main budget expenditure.

3 Main budget revenue.

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