Chapter 15

Fiscal policy

Learning outcomes

• Define fiscal policy and describe fiscal goals and instruments at the macroeconomic, sectoral and microeconomic levels

• Discuss the evolution of views on the macroeconomic role of fiscal policy, focusing on the distinction between the Keynesian and structural approaches and the choice between discretionary and rules-based fiscal regimes

• Distinguish between the various definitions of budget balance and explain the economic significance of each.

Learning outcomes (continued)

• Explain the importance of distinguishing between a cyclical and a structural budget deficit and between active and passive fiscal policy

• Explain the fiscal consequences of the 2007–2009 international financial crisis and the ensuing Great Recession

• Describe salient features of fiscal policy in South Africa with reference to theory, and against the backdrop of international experience and aspects of the performance of the South African economy

• Describe some of the features of fiscal reform in sub-Saharan Africa in recent years.

The nature of fiscal policy

Goals• Economic growth• Job creation• Price stability• Balance of payments stability• Price stability• A socially acceptable distribution of income• Poverty alleviation.

Fiscal policy may be defined as decisions by national government regarding the nature, level, and composition of government expenditure,

taxation and borrowing, aimed at pursuing particular goals.

Goals

Sectoral goals• Development of particular economic sectors• Pursuit of social goalsMicroeconomic goals• Improving efficiency• Combating poverty• Pursuing goals specific to particular geographical

areas.

Instruments of fiscal policy

Macro instruments

• Total government expenditure• Economic categories of

consumption and capital expenditures

• Total tax amount• Budget deficit• Financing the deficit

Micro instruments

• Expenditure votes and programmes

• Mobilisation and allocation of public and private resources

• Allocation of public and private resources

• Different types of taxes and rates

• Different dimensions of public debt.

Macroeconomic role of fiscal policy

• Keynesian approach– Fiscal activism/anti-cyclical fiscal policy– Automatic or built-in stabilisers– Passive fiscal policy– Active fiscal policy.

A framework for analysing Keynsian anti-cyclical fiscal policy

The distinction between automatic stabilisers and active fiscal policy

Shortcomings of anti-cyclical fiscal policy• Lags or time delays

– Recognition– Decision– Implementation– Impact

• Crowding out– Multiplier effect

• Anticipation of systematic counter-cyclical policies– Ricardian equivalence theorem.

• Political constraints• Stagflation.

The structural approach to fiscal policy

• Supply-side economics• Characteristics

– Public debt– Tax burden– Government spending.

Structural and cyclical budget balances

The fiscal implications of the 2007 – 2009 international financial crisis

Conventional and structural fiscal deficits as a % of GDP

Discretion versus rules

• Numerical rules– Expenditure-limiting rules– Current-balance rules– Overall-balance rules– Public debt rules

• Rules as binding constraints– Discretionary policy

• Rules as credibility-enhancing commitment devices– Rational expectations hypothesis.

Accountability enhancing transparency

Fiscal transparency means being open to the public about the structure and functions of government, fiscal-policy

intentions, the public-sector accounts, and fiscal projections .

(Kopits and Craig, 1988).

Assessment of fiscal rules vs discretion

Fiscal councils• Objective analysis• Independent projections and forecasts• Normative assessments.

Fiscal policy in South Africa

National budget• Budget speech• Budget review• Components of the budget:

– Expenditure• Contingency reserve

– Revenue– Borrowing requirement– Financing.

Medium-term fiscal planning

• Medium Term Budget Policy Statement• Multi-year fiscal/expenditure planning• Multi-year budget

– Formal, statutory multi-year appropriation of funds

• Multi-year plan– Statement of intent – a reference framework for the annual

budget

• Medium-term expenditure framework– 3-year plan.

Macroeconomic aspects of fiscal policy in South Africa• After WWII: Keynesian policies• Late 1970’s: Focus on fiscal discipline• 1994 – 1997: Price stability• 1999: Growth through microeconomic reforms• 1996: GEAR strategy• Post 2001: More expansionary fiscal policy.

Fiscal rules in South Africa

• Inflation targeting• Constitutional protection of the independence of the

central bank• Formal numerical fiscal rules• Public Finance Management Act (1999)• Fiscal discretion.

Fiscal reforms in sub-Saharan Africa

• Improvement in budget balances• Reduced dependence on international trade taxes• Reductions in income tax rates• Broadening of tax bases• Reduced debt burdens due to

– Faster economic growth– Accelerated debt relieve– Smaller fiscal deficits.

Thank you.