FISCAL DEFICIT-ECONOMIC GROWTH NEXUS IN SOUTH AFRICA: A THRESHOLD ANALYSIS

Abstract

The rising government spending over time has exacerbated the fiscal deficit. The federal budget deficit as a proportion of GDP has been rising for a decade with little indication of respite. The South African government has boosted spending, especially amid the 2008/2009 global financial crisis and the 2019 pandemic. While a budget deficit can benefit some economies, it can also harm others. This study used quarterly data from 1996Q3 through 2021Q2 to explore whether a budget deficit benefits or harms South Africa's economic performance. Another goal was to determine the point at which fiscal deficits start to impact economic growth negatively. The threshold value was obtained using the autoregressive distributed lag (ARDL), and threshold autoregressive (TAR) approaches. The findings suggest that the neoclassical paradigm holds in South Africa, with higher budget deficits affecting economic development. A -3.6 percent threshold was also found, close to the "healthy" deficit level of 3%. A budget deficit beyond this threshold number has a severely detrimental impact on economic growth in South Africa.