Essays on Dynamic Fiscal Incidence Modelling in South Africa

Abstract

This thesis considers fiscal incidence modelling in South Africa. We use literature and empirical data to show that the bulk of government expenditure in South Africa is unproductive. For this reason, we suggest an alternative fiscal policy mix that focuses on a specific, productive and wealth-creative expenditure item, investments. By indirectly contributing to greater levels of investments we show that better levels of economic output and social development can be obtained. To analyse the economic consequences of the suggested fiscal policy mix we construct a dynamic, regional computable general equilibrium model. We also add additional features to provide more accurate and detailed results. These include multiple household modelling, social accounting matrix modelling, as well as an in-depth allocation of fiscal expenditures. A policy simulation determines the fiscal incidence of keeping the government real wage bill fixed for a period of five years. Perpetual savings generated by this decision is used to increase investments via a subsidy in the construction industry. From our results the two main contributions of our research emerge. First, the policy simulations provide a detailed analysis of an alternative fiscal policy mix and show that our mix leads to greater levels of economic and social development. By social development we specifically refer to the additional jobs that were created and the increase in real household income, spending, and savings. This fresh, evidence-based perspective on fiscal policy provides policymakers and researchers key insights about the fiscal incidence of government policies in South Africa. Second, TERM-SA provides a flexible tool for evaluating many other economic and political topics as they relate to the South African economy.