Government Debt and Capital Formation Nexus in South Africa: The Role of the Debt Threshold

Eliphas Ndou and Nombulelo Gumata
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Nombulelo Gumata: Eldoreigne X3

Chapter Chapter 5 in Fiscal Policy Shocks and Macroeconomic Growth in South Africa, 2023, pp 61-76 from Springer

Abstract: Abstract This chapter sought to investigate the level at which rising government debt starts to have adverse effects on fixed capital formation. The chapter performs an iterative procedure to determine the band within which rising gross government loan debt to nominal GDP ratio has (i) positive crowding-in effects, (ii) no effects, and (iii) negative crowding-out effects on fixed capital formation in South Africa. Evidence shows the threshold at which government loan debt to GDP ratio crowds in fixed capital formation until a debt threshold of 48 per cent is reached. An increase in the gross government loan debt ato GDP ratio up to the threshold of 48 per cent leads to significant crowding in of fixed capital formation. Increases in gross government loan debt to GDP ratio between the thresholds of 49 per cent and 52 per cent have no significant impact on fixed capital formation. However, there is a significant crowding-out effect of fixed capital formation when government debt to GDP exceeds the 52 per cent threshold. This indicates that excessive government loan debt to GDP above the 53 per cent debt threshold significantly crowds out fixed capital formation. These results imply that the impact of the government debt thresholds on fixed investments should be taken into account when designing growth-enhancing policy interventions.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-37755-6_5

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DOI: 10.1007/978-3-031-37755-6_5

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