To the extent that South Africa pursued countercyclical fiscal spending, it was predominantly discretionary. Its primary automatic stabilizer on the expenditure side is payments from its Unemployment Insurance Fund (UIF), which comprised a particularly small share of the country’s overall budget, limiting its effect on aggregate demand.<sup>5</sup> In its pursuit of discretionary fiscal policy as a stabilization tool, the South African government made only limited explicit reference to which expenditures have been increased specifically in response to the business cycle. The absence of clear identification of discretionary spending, including amounts and time-frames, may have led to fungibility between funding unfunded or insufficiently-funded mandates (baseline expenditure) and discretionary fiscal spending, making the discretionary fiscal policy responses more difficult to reverse upon changes in the business cycle. Interestingly, in the 2015 MTBPS the government proposed a “fiscal guideline” linking expenditure in the outer-year of its three-year budget-planning-framework to potential GDP. While it is not clear if the proposed “fiscal guideline” was adopted and implemented, even if adopted earlier its potential efficacy would have been limited by the accuracy of potential GDP estimates.

Moreover, A country is more likely to have a procyclical fiscal policy bias to the extent that its _expenditure composition_ is distributed in favor of expenditure items that display procyclical behavior. Of particular relevance to South Africa is wage spending, given its rapid growth since 2008, contributing 38% to the overall increase in expenditure between 2008 and 2016 (see Table 4). Several studies find the public sector wage bill to behave in a strong procyclical manner across the economic cycle (in booms and busts) (Eckardt and Mills, 2014, Lamo et al. 2013, and Lane, 2003). In addition to the overall wage bill being procyclical, Lamo et al (2013) also find that public employment levels, and remuneration per public sector employee also move in the same direction as the business cycle.

With rapid growth in the public wage bill since 2008, due to headcount growth and above-inflation remuneration increases, South Africa’s public wage bill is likely to have contributed to a procyclical fiscal policy bias. As upward-adjustments to the public wage bill are politically difficult to reverse, de facto, wages in South Africa are nondiscretionary. This is likely to have limited the extent to which the government was able to respond to a downward phase in the economic cycle, resulting in entrenched medium-term compositions relative to other expenditure items.

**Table 4: Consolidated public spending by main category** _(share of total central government expenditure)_

|_(share of total)_|1997/98|2001/02|2008/09|2014/15|2016/17|Contribution to<br>overall increase in<br>expenditure (%)<br>2008/09-2016/17|
|---|---|---|---|---|---|---|
|Compensation of employees|39%|37%|33%|34%|35%|38%|
|Transfers|20%|29%|34%|40%|33%|32%|
|Goods and services|13%|13%|17%|12%|14%|12%|
|Interest payments|20%|18%|8%|10%|11%|13%|
|Capital|8%|4%|7%|4%|6%|6%|
|_Total_|_100%_|_100%_|_100%_|_100%_|100%|-|

Source: Budget Reviews and authors’ calculations.

> 5 The degree to which Unemployment Insurance Fund disbursements serve as an automatic stabilizer is limited by the portion of the population eligible for UIF unemployment benefits, slow employment growth, and modest rand value of unemployment benefits disbursed. To be eligible for UIF unemployment benefits, a person had to previously contribute to the UIF, generally necessitating formalized employment. On average, about 40% of the employed have historically not been eligible for UIF.

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