The Economic Determinants of Budget Deficits in South Africa

Abstract

Since 1980, South Africa recorded massive budget deficits except in 2007 and 2008 when the budget surpluses as a percentage of GDP respectively stood at 0.3 per cent and 0.7 per cent. This stirred a great debate on whether budget deficits in South Africa are a result of poor governance or are due to the magnitude of the economic problems that the government seeks to alleviate. Therefore, this study examines the economic determinants of budget deficits in South Africa for the period 1980 – 2010. Specifically, the study seeks to ascertain if budget deficits in South Africa are a result of the fight against economic problems. The Vector Error Correction Model (VECM) was used to determine the impact of selected macroeconomic variables on budget deficits in South Africa. The results revealed that all the determinants have a positive impact on budget deficits except for foreign debt. However, foreign reserves explain the largest component variation of budget deficit followed by foreign debt, unemployment, economic growth and government investment, in that order.

DOI: 10.5901/mjss.2013.v4n13p561