Fiscal consolidation and macroeconomic performance in South Africa

Abstract

Background: This study examines the macroeconomic effects of fiscal consolidation in the post-2008-2009 global financial crisis, focusing on its impact on economic growth, unemployment and income inequality. Prompted by persistent budget deficits, rising government debt and low revenue generation, issues intensified by the 2008–2009 global financial crisis, South Africa adopted fiscal consolidation as a corrective measure.
Aim: This study analyses the macroeconomic consequences of fiscal consolidation in post-global financial crisis-South Africa by examining its effects on economic growth, unemployment and income inequality.
Setting: The study focuses on South Africa in the post-2008–2009 global financial crisis period.
Methods: Using the Johansen-Juselius Cointegration Test and the Vector Error Correction Model (VECM), the analysis evaluates the short- and long-run interactions between fiscal consolidation indicators and key macroeconomic outcomes.
Results: The findings reveal that while fiscal consolidation improves budget balances, it can suppress economic growth and exacerbate inequality without complementary social and employment-supportive policies. The effects of fiscal adjustment vary across economic contexts and approaches, with developing countries such as South Africa facing more complex trade-offs.
Conclusion: The article concludes with recommendations for a balanced fiscal consolidation framework that aligns fiscal discipline with inclusive economic development.
Contribution: The study adds to the literature by jointly analysing the effects of fiscal consolidation on economic growth, employment and income inequality in South Africa. It applies a VECM framework to analyse macroeconomic outcomes and includes distributional impacts in the analysis of fiscal consolidation, examining the trade-offs policy-makers face.