Fiscal regime changes and the sustainability of fiscal imbalance in South Africa; a smooth transition error-correction approach

In addition to the conventional linear cointegration test, this paper tests the asymmetry relationship between fiscal revenue and expenditure, by making a distinction between the adjustment of positive (budget surplus) and negative (budget deficit) deviations from equilibrium. The analysis uses quarterly data for South Africa. The paper reveals that government authorities in South Africa are more likely to react fast when the budget is in deficit than when in surplus, and that the stabilisation measures used by government are fairly neutral at low deficit levels; that is, at deficit levels of 4% of GDP and below. We conclude that an attempt to achieve fiscal sustainability via a reduction in expenditure on sectors conducive to economic growth might be prone to create social and political shocks, which could render such fiscal policy unsustainable. In South Africa the main fiscal challenge, therefore, is to find ways through which the recent gains in fiscal solvency can be consolidated.