Time-Varying Elasticity of Cyclically Adjusted Primary Balance and Effect of Fiscal Consolidation on Domestic Government Debt in South Africa

Eugene Msizi Buthelezi () and Phocenah Nyatanga
Additional contact information
Eugene Msizi Buthelezi: School of Accounting, Economics and Finance, University of KwaZulu-Natal, Pietermaritzburg 3219, KwaZulu-Natal, South Africa
Phocenah Nyatanga: School of Accounting, Economics and Finance, University of KwaZulu-Natal, Pietermaritzburg 3219, KwaZulu-Natal, South Africa

Economies, 2023, vol. 11, issue 5, 1-27

Abstract: This paper investigates the impact of the time-varying elasticity of the cyclically adjusted primary balance (CAPB) and fiscal consolidation on government debt. The time-varying parameter structural vector autoregression (TVP-VAR) model is used on a time series of data from 1979 to 2022. The contribution of this paper is on the understanding of the impact of fiscal consolidation on domestic government debt and the need to use time-varying elasticity when calculating the cyclical adjusted primary balance to provide a more accurate representation of discretionary actions taken by fiscal authorities. It is found that there is more variation in the CAPB with time-varying elasticity than with constant elasticity. Constant elasticity is not effective in capturing fiscal consolidation episodes, and time-varying elasticity is a better alternative. There is evidence that fiscal consolidation increases domestic government debt. The shocks of fiscal consolidation through government expenditure cuts reduce domestic government debt in the long run, while taxes increase domestic government debt. It is recommended that fiscal authorities use fiscal consolidation to reduce government expenditure that is related to inefficient expenditure. In the event of government expenditure, this expenditure needs to be in productive sectors of the economy that will bring about an increase in revenue rather than an increase in the tax rate. Given the result, a tax increase should be something that fiscal authorities are not using in the effort to stimulate economic growth or reduce domestic government debt.

Keywords: fiscal consolidation; domestic government debt; cyclically adjusted primary balance (CAPB); time-varying parameter structural vector autoregression (TVP-VAR) (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.mdpi.com/2227-7099/11/5/141/pdf (application/pdf)
https://www.mdpi.com/2227-7099/11/5/141/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jecomi:v:11:y:2023:i:5:p:141-:d:1142246

Access Statistics for this article

Economies is currently edited by Ms. Hongyan Zhang

More articles in Economies from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().