Naional saving and Fiscal Policy in Souh Africa: an Empirical Analysis by Lumengo Bonga-Bonga Universiy of Johannesburg
Inroducion A paricularly imporan issue in Souh Africa is he exen o which fiscal policy affecs naional saving. The decline in naional saving in Souh Africa has been aribued o he decrease in governmen saving, especially from he early 1980s o early 1990s (Tsikaa, 1998; Heyns, 1995). Furhermore, he low-growh rap experienced by Souh Africa since he mid- 1980s has been assigned o he coninuous decline in naional saving, and an improved naional performance in respec of saving is frequenly regarded as a prerequisie for higher economic growh in Souh Africa (Aron & Muellbauer, 2000). The adopion of he GEAR policy as he Souh African macroeconomic policy in 1996 has emphasised fiscal discipline characerised by a low raio of defici
by gross domesic produc (GDP) as he anchor of fiscal policy. Is fiscal discipline, as fiscal policy sance, he key o reversing he decreasing rend in naional saving in Souh Africa? Focus of he sudy To deermine he exen o which fiscal policy influences gross naional saving in Souh Africa. Recen developmen of gross saving in Souh Africa Figure 1: Gross naional saving as percenage of GDP 40 35 30 25 20 15 10 5 0 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
While he gross saving rae reached is peak of 33.94% in 1980, he rae was 13.96% in 2006. Figure 2: Gross naional, privae and governmen saving as a percenage of GDP 40 35 30 25 20 15 Saving by GDP 10 5 0-5 -10
The rend of gross naional saving by GDP seems o be influenced by he rend of privae saving. The realiy in Figure 2 may challenge he opinion of many auhors ha redressing he naional saving rend in Souh Africa should sar by redressing governmen saving. See rend from 1996. Figure 3: Raio of capial formaion by GDP (in blue) and gross saving by GDP (in red) 40 35 30 25 20 15 10 5 0
As a resul of he isolaion, Souh Africa had o rely on is naional saving o finance invesmen demand (1986-1994) Things changed wih he opening and inegraion of he counry in 1994. The aboliion of sancions by he inernaional communiy resuled in he increasing inflow of foreign capial and he counry could susain a rade defici and finance par of he domesic invesmen by foreign borrowing. To reduce Souh Africa s dependence on foreign borrowing and any defaul or sovereign risk ha may occur, as well as o break he low-growh rap endured for decades, Souh Africa needs o adop srong policy acion o reverse he curren decreasing rend of naional saving. Can fiscal discipline as he anchor of he Souh African policy be a remedy o he low naional saving?
Daa Analysis and Mehodology To characerise he dynamic impac of fiscal policy on naional saving, we make use of he SVAR echnique o obain he response of naional saving o fiscal policy shocks from he IRFs. Wha he SVAR model evenually aemps o achieve is o deduce a srucural form relaionship from he reduced-form VAR.
Equaion 1 below, represening a srucural form model leads o a reduced-form relaionship as represened by Equaion 2. Y Y B( L) Y e (1) 1 B 1 ( L) Y e or Y B ( L) Y * (2) I can be inferred from Equaion 1 and Equaion 2 ha: * 1 B ( L) B( L) (3) and 1 e (4). Equaion 4 is he core represenaion of he SVAR model whereby he reduced-form disurbance is relaed o he underlying srucural shocks e. So imporan when deermining he effec of srucural shocks The imporan challenge in a SVAR modelling is o recover he srucural shocks e from he observed reduced-form innovaion (idenificaion problem).
The paper imposes resricions on he parameer marix Г in order o model he conemporaneous relaionship beween he reduced-form and srucural form innovaions. In assessing he dynamic impac of fiscal shocks on naional saving, his paper also aemps o es wheher he Ricardian Equivalence Proposiion holds in Souh Africa. On he imporance of fiscal policy on naional saving, Barro (1974), in suppor of he Ricardian Equivalence Proposiion (REP), demonsraed ha if households are fully raional and ake he well-being of heir descendans ino accoun in formulaing heir consumpion and savings paerns, decline in axes oday would be balanced by offseing increases in privae saving oday. In paricular, households would recognise ha he reducion in axes oday would increase fuure ax liabiliies and herefore save he ax cu. Thus, he implicaion of he REP is ha an increase in he budge defici is neural on naional saving.
To idenify he effecs of fiscal policy on naional and privae savings, his sudy uses wo differen vecors. Each vecor is made of four variables. The firs vecor is consiued of he following variables: he raio of gross naional saving by GDP (SAV), he general governmen budge balance (DEF) represened by he raio of defici by GDP, he real ineres rae (RATE) and he firs difference of he log of permanen or poenial oupu (GROW) calculaed by using Hodrick-Presco (HP) filer. The second vecor conains DEF, GROW, RATE and he raio of governmen saving by GDP (PSAV). Use is made of permanen oupu in esing for he REP because he proposiion relies on forward-looking agens who base heir decisions o consume or o save on heir permanen income.
Conrary o differen sudies ha use srucural budge balance as a proxy for fiscal policy in Souh Africa, he use of he acual budge balance is jusified by hree reasons: firsly, in Souh Africa he cyclical componens of he general governmen budge balance represen only a small par of he oal balance since he 1970s (Swanepoel & Schoeman, 2003). Secondly, hough here are differen opinions on how srucural balance budge should be calculaed in he case of Souh Africa, acual and srucural balance budge have been rending in he same direcion since he 1970s (Swanepoel & Schoeman, 2003:815 and Du Plessis, Smi & Surzenegger, 2007:397). The hird reason is relaed o he aim of his sudy, which is o evaluae he effec of he observed or acual fiscal shocks on saving
Annual daa from 1970 o 2006 are used in he model esimaion. The sudy employs he Kwiakowski, Phillips, Schmid, and Shin (KPSS) mehodology for he es of saionariy of he daa series as i is considered o be more powerful compare o he Augmened Dickey-Fuller (ADF) mehodology in small samples (Delong e al., 1989 and Lee and Schmid, 1996). The resuls in Table A2 show ha all he series are saionary. The VAR models were esimaed wih consan, linear rend and wo lags (suggesed by he Akaike Informaion Crieria). The AR roo lag srucure indicaes ha no roo lies ouside he uni circle; hence he VAR saisfies he sabiliy condiion.
The idenificaion condiion in he four-variable VAR is represened by he marix below as: 1 a a a 21 31 41 0 1 a a 32 42 0 0 1 a 43 0 0 0 1 DEF RATE SAVE GROW e e e e DEF RATE GROW SAVE WhereSAVE conains SAV or PSAV The resricions imposed on marix A imply ha: Unanicipaed changes in fiscal policy will no conemporaneously respond o naional saving and oupu growh or o he economy in general. This should be rue, from he definiion of discreionary or unanicipaed change of fiscal policy (Hayford, 2005:985). In seing a 23 and a 24 equal o zero, he sudy assumes ha here is a lag response of real ineres rae o change in naional or privae saving as well as o oupu growh.
In seing a 34 equals o zero, i is assumed ha oupu growh changes direcly from he change in invesmen and indirecly (wih lag) from he change in saving. Saving should firs influence invesmen before i impacs on GDP. Empirical Resuls Figure 4: Responses of naional saving o one-sandard deviaion srucural shocks Response of SAV o DEF Response of SAV o RATE Response of SAV o GROW Response of SAV o SAV.03.03.03.03.02.02.02.02.01.01.01.01.00.00.00.00 -.01 -.01 -.01 -.01 -.02 1 2 3 4 5 6 7 8 9 10 -.02 1 2 3 4 5 6 7 8 9 10 -.02 1 2 3 4 5 6 7 8 9 10 -.02 1 2 3 4 5 6 7 8 9 10 Noe: Response Funcion ------- 95% Mone Carlo confidence inerval The resuls of he IRF in Figure 4 show ha SAV responds negaively o posiive fiscal shocks (fiscal discipline), hough his effec disappears over ime (afer a period of six years).
This should imply ha he effec of naional saving o fiscal policy shocks is neural in he long erm. Figure 4 shows ha he response of naional saving o shocks o oupu growh is neural for mos of he periods. This is in line wih he findings of oher sudies (see Odhiambo, 2005). Figure 5: Responses of Privae Saving o one-sandard deviaion srucural shocks Response of PSAV o DEF Response of PSAV o RATE Response of PSAV o GROW Response of PSAV o PSAV.8.8.8.8.4.4.4.4.0.0.0.0 -.4 -.4 -.4 -.4 -.8 1 2 3 4 5 6 7 8 9 10 -.8 1 2 3 4 5 6 7 8 9 10 -.8 1 2 3 4 5 6 7 8 9 10 -.8 1 2 3 4 5 6 7 8 9 10 Noe: Response Funcion ------- 95% Mone Carlo confidence inerval
Discussion of he Resuls The IRF for naional and privae savings o he idenified srucural shocks show ha naional and privae savings respond negaively o posiive fiscal shocks (fiscal discipline) for a period of less han 6 years. The negaive response of naional saving o fiscal discipline during ha period should be an indicaion ha in Souh Africa he negaive response of privae saving o fiscal discipline more han offse he posiive effec of governmen saving o fiscal discipline. This resul is conrary o mos findings, especially in developed counries, where he negaive effec of privae saving o fiscal policy shocks less han offse he effec of governmen saving o he same shock (Gale and Poer, 2002 and Pesaran and Smih, 1995). Conrary o expecaions, here is a negaive effec of naional and privae saving o real ineres rae shocks in Souh Africa. A number of empirical sudies conduced on Souh Africa also suppor he finding ha naional saving responds
negaively o real rae of ineres shocks (Harjes and Ricci, 2005 and Hussain, Mohammed and Kameir, 2003). This should imply ha in Souh Africa he posiive income effec of he real rae of ineres dominaes he negaive subsiuion effec. The subsiuion effec of a higher ineres rae is o encourage agens o sacrifice curren consumpion for fuure consumpion and herefore save more. Bu he income effec is o discourage saving by giving agens more income in he presen and hence more prone o consume han o save. The resuls of he IRF in Figure 4 show ha in he long erm he response of naional saving o posiive fiscal shocks is neural. This should lead o conclude ha change in he fiscal policy have lile or no effec on naional saving in he long erm.
Hisorical Decomposiion A hisorical decomposiion of SAV allows us o assess how much of he movemen in SAV can be accouned for by fiscal policy shocks. For ha assessmen he acual SAV is compared wih boh a baseline forecas of SAV, assuming no shocks o fiscal policy, and a forecas ha includes fiscal shocks. Figure 6: Acual SAV, Baseline forecas SAV and SAV wih fiscal shocks 3 2 1 0 SAV(wih shocks) SAV (Baseline) Acual SAV -1-2 1970 1975 1980 1985 1990 1995 2000 2005
Figure 6 shows ha when fiscal shocks improve he forecas of naional saving in Souh Africa, hey only accuraely accouned for he urning poins of SAV in he periods beween 1978-1982, 1983-1989 and 1997-2000. These findings show ha, while fiscal policy is an imporan facor in explaining naional saving (surely by is impac on governmen saving), i neverheless does no accoun for mos of he changes in saving in Souh Africa. This finding implies ha here should also be oher imporan facors (such as exra-economic facors) raher han fiscal policy ha can conribue o improve he level of naional saving in Souh Africa.
Conclusion The resuls of he impulse response funcions show ha he effec of he posiive shocks o fiscal policy (fiscal discipline) on he privae saving is negaive in he shor erm (less han 6 years). The resuls of he impulse response funcions also show ha naional saving responds negaively o posiive fiscal policy shocks during he same period. These resuls should indicae ha he effec of privae saving from fiscal shocks more han offses he effec of governmen saving from he same shocks. The finding suppors he view ha parial raher han full REP holds in Souh Africa in he shor erm. Hisorical decomposiion analysis shows ha fiscal shocks impac on naional saving only in a few periods of he analysis. On average, he effec of fiscal shocks on naional saving is neural.
The paper concludes ha, while fiscal policy, especially fiscal discipline, is imporan in increasing governmen saving, fiscal policy in general fails o simulae privae saving. For Furher research, privae saving should be disaggregaed and find he response of each componen o fiscal shocks.