FISCAL SUSTAINABILITY AND THE FISCAL REACTION FUNCTION FOR SOUTH AFRICA: ASSESSMENT OF THE PAST AND FUTURE POLICY APPLICATIONS

How does the South African government react to changes in its debt position? In investigating this question, this paper estimates fiscal reaction functions using various methods (ordinary least squares, threshold autoregressive, state-space modelling and vector error-correction model). This paper finds that since 1946, the South African government has run sustainable fiscal policy by reducing the primary deficit or increasing the surplus in response to rising debt. Looking ahead, this paper considers the use of fiscal reaction functions to forecast the debt/gross domestic product (GDP) ratio and gauging the likelihood of achieving policy goals with the aid of probabilistic simulations and fan charts.