UNU-WIDER paper on macroeconomic risks in South Africa 2007-2020

The paper entitled Macroeconomic Risks after a Decade of Microeconomic Turbulence by Ricardo Hausmann, Federico Sturzenegger, Patricio Goldstein, Frank Muci, and Douglas Barrios was published in January 2022. To access the paper, please click here.

Hausman et al (2022) point out that empirical estimates of fiscal multipliers in South Africa have varied markedly, Fiscal multipliers measure the impact of increased government spending or increased taxes on GDP growth of a country. Hausman et al (2022) observe that while some estimates (e.g. Schröder & Storm, 2020) have suggested that South African fiscal multipliers are as large as 1.68 in 2018 (i.e. for every additional rand spent in government expenditure, GDP would increase by R1.68), other estimations have indicated that fiscal multipliers are small. Kemp (2020) has characterized expenditure multipliers as positive but less than one and revenue multipliers as bigger but more distortionary, while Jooste, Lui and Naraidoo (2013) estimated that the multiplier peaks at 0.6 after 5 quarters with no long run effect on GDP. The analysis in Hausman et al’s (2022) paper supports the hypothesis that expenditure multipliers are low and negative, leading them to conclude that fiscal consolidation after 2012 did not dampen growth and “(i)f anything helped the economy to recover” (Hausman et al., 2022:34). They therefore assert:

“On balance, while South Africa’s macro policy resulted in a large debt build-up, the arguments and evidence that macro policy slowed GDP growth are not compelling. First, because public dissaving generated a countervailing move in private savings, neutralizing its effect on aggregate demand. Second, because once government spending (with its financing combo) is simulated in the economy a fiscal expansion has a negligible effect on output. In short, more government spending, financed with taxes or debt, just engineered a switch from private to public consumption, as the economy reacted more in a Ricardian than in a Keynesian fashion. This may have had significant efficiency effects, but it is more difficult to argue, at least through 2019, that it had strong macroeconomic effects. In other words, neither can we support the claim that the crowding out effect was detrimental to growth, nor the claim that the attempts at fiscal consolidation were responsible for the growth decline. Although macro policy was indeed ineffective in reverting the slowdown, it did not itself cause it”

Hausman et al (2022: 35)