The challenge of persistently increasing budget deficits and government debt faced by many countries worldwide is a result of the 2008/2009 global financial crisis, coupled with subsequent low economic growth. South Africa is heading towards a fiscal cliff because of rising government expenditure and declining tax revenue (Tandon et al. 2020). An increase in the budget deficit and government debt signals an economic challenge of scarcity and an inability to generate sufficient tax revenue required to finance government expenditure. Governments use expenditures to achieve macroeconomic objectives (Moyo, Samour & Tursoy 2021; Tala 2024; Tendengu, Kapingura & Tsegaye 2022). Governments use tax collection to finance government expenditure; therefore, the inability to achieve macroeconomic objectives (Moyo et al. 2021; Tala 2024; Tendengu et al. 2022). Countries implemented fiscal consolidation frameworks to maintain and ensure fiscal discipline. Fiscal consolidation refers to the policies implemented to reduce the budget deficit and slow debt accumulation (Havemann & Hollander 2024). However, it has been observed that implementing fiscal consolidation can undermine other macroeconomic objectives, such as achieving economic growth, creating employment, and promoting equality (Georgantas, Kasselaki & Tagkalakis 2023). The potential impact of the fiscal consolidation framework on macroeconomic variables depends on how fiscal consolidation is implemented. Governments implement fiscal consolidation motivated by its positive aspects, but often overlook its negative aspects.

Several studies have investigated the determinants of fiscal consolidation, and the findings suggest that countries implement it to achieve macroeconomic stability or stabilisation (Arizala et al. 2021; Centinaio et al. 2024; Havemann & Hollander 2024; Nandy & Sur 2024). Macroeconomic stability refers to a balanced relationship between macroeconomic variables, including government revenue, government expenditure, output, and domestic demand. A study by Centinaio et al. (2024) found that fiscal consolidation is implemented to improve the country’s macroeconomic policy framework. A study by Chugunov et al. (2021) found that countries implement fiscal consolidation to stimulate economic growth.

The successful implementation of fiscal consolidation differs between advanced economies and developing economies. The existing literature acknowledges that advanced economies reduce government expenditure to attract job creation and economic growth. In contrast, reductions in government expenditure in developing countries lead to increased inequality, slower growth, and higher unemployment (Chugunov et al. 2021; Kim et al. 2021; Poku, Opoku & Agyeiwaa 2022).

Fiscal consolidation requires governments to allocate funds to economic functions to stimulate economic growth and reduce budget deficits. Yabré and Semedo (2021) stated that the consequences of fiscal consolidation depend on the government’s decisions regarding fiscal adjustments. This article focuses on analysing the macroeconomic effects of fiscal consolidation in South Africa. The challenge of increasing the budget deficit in South Africa is not a new economic tragedy; it dates to the 2008–2009 global financial crisis. The budget deficit is common worldwide, but it becomes challenging when it threatens economic growth and development in developing countries such as South Africa.

South Africa has yet to conduct extensive research into the potential implications of fiscal consolidation for macroeconomic performance. The study aims to analyse the impact of fiscal consolidation on economic growth, employment, and inequality. Few studies have investigated the impact of fiscal consolidation on macroeconomic performance. The recent study by Buthelezi (2023) investigated the threshold for cyclical fiscal consolidation episodes. The other study by Havemann and Hollander (2024) focused on fiscal sustainability. Some key South African macroeconomic objectives include achieving economic growth, creating employment, and promoting equitable income distribution. Successful fiscal consolidation is said to bring about economic growth, stimulate job creation, and bring about equality (Balasundharam et al. 2023; De Souza Cardoso & Barbosa de Carvalho 2023; Georgantas et al. 2023; Heimberger 2020; International Monetary Fund [IMF] 2014, 2020; McManus, Ozkan & Trzeciakiewicz 2021; Sakkas & Varthalitis 2019). South Africa is among the countries aiming to achieve inclusive economic growth, which encompasses the sustainable and equitable distribution of socioeconomic resources (Sharma 2020).

Despite the growing use of fiscal consolidation frameworks in developing economies, there is limited knowledge about their impact on growth, employment, and inequality in South Africa. This study aims to empirically assess the effects of fiscal consolidation on key macroeconomic outcomes, namely, economic growth, employment, and income inequality in South Africa. Like many developing economies, South Africa has experienced a sustained rise in public debt and budget deficits since the 2008–2009 global financial crisis. Low economic growth and diminishing tax revenues further exacerbate these fiscal challenges. While fiscal consolidation is promoted as a strategy to restore macroeconomic stability, its implementation often conflicts with other policy goals such as employment creation, inclusive growth, and income equality. These objectives are central to South Africa’s developmental agenda. However, there is limited empirical evidence on how fiscal consolidation has affected these macroeconomic variables in South Africa. This study aims to fill that gap by examining the short- and long-term effects of fiscal consolidation on economic growth, unemployment, and income inequality in South Africa during the post-2008–2009 global financial crisis period. A plethora of literature has addressed fiscal consolidation, but, for the most part, studies focus on either fiscal sustainability or economic growth. Moreover, researchers have neglected the joint effects on growth, employment, and income inequality in South Africa. Analysis of these macroeconomic outcomes is conducted alongside an assessment of the distributional effects of fiscal policy within a Vector Error Correction Model (VECM) framework. This study extends the existing literature in three important respects. Firstly, the study contributes to the literature by jointly analysing economic growth, employment, and inequality within a unified estimation framework. Secondly, it adds to the literature on fiscal consolidation, given the limited empirical evidence for South Africa. Thirdly, the distributional effects of fiscal policies provide important insights for inclusive policymaking.

The macroeconomic environment in South Africa is worrisome and warrants intervention; hence, the fiscal consolidation framework is being implemented. However, as the trajectory is reversed, it is crucial to ensure that no negative externalities accrue, which could be even more destabilising.

A bar graph comparing government expenditure and national tax revenue over different years, highlighting fluctuations and the growing gap between spending and income in South Africa (Figure 1).

Since the global financial crisis, South Africa’s economic growth rate has averaged 1.3%, compared with the global average of around 3.1%. A slow-growing economy needs to provide more room for revenue generation, as the tax base will be smaller. Nevertheless, expenditures may be expanding, and in South Africa, the social net has been increasing rapidly, with over 22 million individuals receiving social grants in one form or another.

Refer to Figure 2 for a multiline graph showing trends in South Africa’s economic growth rates, fiscal deficit, and public debt levels over time, illustrating economic pressures and rising debt burden.

Figure 3 presents gross domestic product (GDP) growth, budget deficit, and central government debt as a percentage of GDP. Since 1994, government debt has been in decline, with the lowest rates observed at the start of the Global Financial Crisis in 2008/09, the shock that led to a rapid spiral of debt, reaching 58% by 2018 and over 74% by September 2022 (CEIC Data 2022). In the same vein, growth has been low since the 2009 recession; some positives were registered only in 2010 and 2011, when growth slowed, and the deficit widened.

Figure 4 shows a bar graph projecting South Africa’s national debt relative to GDP from 2017 to 2027, showing a gradual upward trend in national debt as a percentage of GDP.

Figure 5 shows a bar graph illustrating annual real GDP growth rates in South Africa from 2017 to 2027, comparing each year’s growth performance to the previous year, with both historical and forecasted values.

Public finance theorists hold differing views on fiscal discipline because of the crowding-out effect of fiscal consolidation policies. In this regard, four theories have been consulted to examine the impact of fiscal consolidation on macroeconomic variables: the Theory of Functional Finance, the conventional Keynesian view, the Modern Monetary Theory (MMT), and the Ricardian Equivalence Theory. The Functional Finance Theory disagrees with the doctrine of public finance stability and the principle that governments balance government expenditure and revenue at the end of each financial period. The theory posits that governments cannot achieve stability in public finance because of the nature of their functions. The government can borrow funds only if it wants the public to hold more government bonds and have less for private consumption.

Furthermore, the theory maintained that the government could increase taxes only if the goal were to reduce public consumption and thereby reduce inflation. Lastly, the government can increase or decrease expenditure to prevent unemployment and inflation. The studies by Buthelezi (2023) and Stoilova and Todorov (2021) found that fiscal consolidation may stimulate economic growth only if government borrowing requirements are reduced, and the fiscal adjustment is designed to support long-term macroeconomic stability and promote sustainable fiscal management.

The Functional Finance Theory is closely related to the Laffer curve’s conceptualisation of the relationship between taxation and government revenue. The argument behind the Laffer curve is that increased taxes lead to decreased government revenue (Laffer 1974). Laffer (1974) argued that the challenge of rising taxation discourages investment and leads to tax evasion. Furthermore, Laffer (1974) argued that a tax increase discourages households from searching for job opportunities. When the labour force is small, government revenue decreases.

The Keynesian view of fiscal consolidation is that it can push the economy into recession if it is fragile (Romer 1986). Keynesians stated that expenditure cuts or tax increases decrease aggregate demand and further reduce tax revenue. The Keynesian approach assumes that economic agents’ consumption and investment decisions are influenced by their expected future income and wealth. In this regard, expenditure cuts can induce economic agents to expect lower taxes and higher net income. These expectations can cause the economic agents to increase consumption of goods and services in the short run. The Keynesian view on fiscal consolidation was that government expenditure should be reduced only when the economy is fully recovered, as doing so can prevent inflation.

On the other hand, MMT maintains that a government budget deficit is beneficial to the economy and that there is no need to reduce it. The theory argues that the government should not reduce the budget deficit so that private savings remain surplus. Mavodyo (2023) supported the MMT view, arguing that a budget deficit is not a threat to economic growth; rather, the problem lies in the deficit’s level.

The Ricardian Equivalence Theory posits that financing government expenditure through borrowed funds or tax revenue does not impact aggregate demand or consumer choices. David Ricardo argued that government borrowing is intended solely to finance government expenditures or the budget deficit and does not affect GDP. Ayunasta, Setiaji, and Hakim (2020), Mehta and Derbeneva (2023), and Mehta (2024) supported this perception, arguing that increased private-sector savings from a higher tax cut, financed by borrowed funds, will be offset by a decline in public-sector spending. Eichler and Pyun (2022) also supported the Ricardian theoretical perception. They argued that the Ricardian Equivalence Theory holds that if economic agents expect the tax burden to rise because of fiscal expansion, private-sector spending can offset the increase in public debt. They argued that the financial consequences of fiscal contraction can be offset by increasing private-sector consumption if economic agents expect the tax burden to decline. The forecasts of macroeconomic theories do not align with policymakers’ views and vice versa. The Keynesian and functional finance approaches suggest that contractionary fiscal policy entails negative consequences for both growth and employment. But Ricardian equivalence is not always true. As a result, the theoretical expectations are put to the test.

The study employed the econometric model proposed by Fatás and Mihov (2001) (Equation 1): Yt=Σi=0k B1,iYt−i+Σi=0k B2,iPt−i +Σi=1k C1,eEt−i[P]+Σi=1k C2,iEt[Pt−i]+AyVty[Eqn 1]

Y denotes GDP needed to estimate induced changes in budgetary variables, which is sufficient for describing the state of the economy.

B and C are coefficients of interest.

P denotes fiscal policy variables, that is, net tax.

Because the estimates enter with K lags, the coeffcient matrices are zero. The equation assumes that, to demonstrate the effects of changes in government spending on other macroeconomic variables, the baseline vector autoregression (VAR) will be employed, and budget estimates will be excluded.

The study employed the econometric model of Lopes and Do Amara (2017) to examine the fiscal consolidation-employment nexus. The econometric model is presented as follows (Equation 2): L=CLC(B)+GLG+lEXEX[Eqn 2] where

L is the employment level of the economy (proxies: employment in the public sector and employment in the private sector)

Lc, l_G, l_EX are the employment content coefficients of the economy’s aggregate demand.

B is the government budgetary balance, given as B= tY + O- G- I^Pub- TR. The equation is tY= average tax rate (the combination of all taxes and payroll contributions), O is net government receipts, which also include interest on public debt, and TR is government transfers.

C, G, and EX denote private consumption, government expenditure, and net exports. These variables represent the aggregate demand in the economy.

To specify this model, there is Model 2.1, which focuses on the nexus between fiscal consolidation and public sector employment. Model 2.2 focuses on the employment nexus between fiscal consolidation and private-sector employment.

The study will employ the econometric model proposed by Buyse (2015) to examine the relationship between fiscal consolidation and equality. The model is given as follows (Equation 3): ΔIi=α+βXi+εi[Eqn 3] where

∆I_i_ is the measure of change in income inequality.

X_i_ is fiscal consolidation composition measures (such as ∆ social expenditure, ∆ public investment, ∆ social contributions, ∆ tax on business, ∆ tax on households, ∆ government consumption) and Ɛ_i _ is the disturbance term.

Ethical clearance to conduct this study was obtained from the Faculty of Business and Economics Sciences, Research Ethics Committee at Nelson Mandela University (No. H22-BES-ECO-085).

Table 1 summarises the descriptive statistics for GDP, Gini, Employment in the Public Sector, Employment in the Private Sector, Government Expenditure, Tax Revenue, Government Debt, and Budget Balance. On average, GDP growth was 2.23%, with moderate variability, while income inequality remained high with a mean Gini coefficient of 0.64. Public and private sector employment exhibit considerable fluctuations over the period, reflecting both expansions and contractions in labour markets. Government expenditure and tax revenue averages suggest substantial fiscal activity relative to GDP, whereas government debt averaged 37.3% of GDP, highlighting the government’s fiscal obligations. Skewness and kurtosis measures, along with Jarque–Bera tests, suggest that GDP, public sector employment, tax revenue, and budget balance are approximately normally distributed. In contrast, private-sector employment, government expenditure, and income inequality exhibit deviations from normality.

The unit root test has been conducted to test the stationarity of the time series data. The Augmented Dickey-Fuller (ADF) and Phillips–Perron (PP) tests were conducted to determine whether the series is stationary (see Appendix 1 Table 1-A1). The findings showed that some variables, such as tax revenue and debt, were not stationary at this level. When some variables are not stationary at the level, a stationary difference is first required. However, only revenue and Gini were not stationary under the ADF test, with a constant trend at the first difference. A stationarity test enables the researchers to determine the technique for estimating the results. Some variables were stationary in levels and others in first differences. Therefore, those stationary at the level are integrated with order 0, and those stationary at the first difference are integrated with order 1. Because the variables are of different orders (0 and 1), as in this case, the Johansen–Juselius Cointegration Test and the Vector Error Correction Model (VECM) are used to estimate the results. In summary, these results indicate that the variables form a multivariate system; therefore, the VECM will be employed.

Table 2 presents the Johansen–Juselius Cointegration test results for four models.

Model 1 tested for cointegration between GDP and fiscal consolidation measures: government expenditure, government revenue, government debt, and budget balance. The result shows that the Trace test is statistically significant and rejects the null hypothesis of r = 0 at a 5% significance level. The Maximum Eigenvalue (Max-Eigen) test results indicate no cointegration between the equations. Therefore, according to the Trace test, there is only one long-run cointegration relationship between GDP and fiscal consolidation indicators. Studies by Antolin-Diaz and Surico (2025), Buthelezi and Nyatanga (2023), Ciaffi, Deleidi, and Di Domenico (2024), and Jiao, Renart, and Serra (2025) found that GDP has a positive relationship with fiscal variables in both the short and long run. Findings from the Johansen Cointegrating test indicate the number of cointegrating equations to be tested in the VECM. Because the Trace test identified 1 cointegrating equation, the VECM will test 1 cointegrating equation.

Models 2.1 and 2.2 tested for cointegration between employment and fiscal consolidation measures: government expenditure, government revenue, government debt, and the budget balance. Model 2.1 focuses on public-sector employment, while Model 2.2 focuses on private-sector employment. For Model 2.1, the results show that the Trace and Max-Eigen tests are statistically significant at the 5% significance level, rejecting the null hypothesis of r = 0. The Trace test also rejects the null hypothesis that r < 1. According to the Trace test, there are two cointegration vectors, whereas the Max-Eigen test indicates 1 cointegrating vector. Therefore, according to the Trace Test, there are two long-run cointegration relationships between public-sector employment and fiscal-consolidation indicators.

On the other hand, the Max-Eigen test indicated that only one long-run cointegration relationship exists between public-sector employment and fiscal-consolidation indicators. For Model 2.2, the results show that the Trace and Max-Eigen tests are statistically significant at the 5% significance level, rejecting the null hypothesis of r = 0. The Trace and Max-Eigen tests also reject the null hypothesis that r < 4. According to the Trace test, there are two cointegration vectors, and the Max-Eigenvalue test indicates two cointegrating vectors. Therefore, according to the Trace test, two long-run cointegration relationships exist between private-sector employment and fiscal consolidation indicators.

On the other hand, the Max-Eigen test indicated only one long-run cointegration relationship between private-sector employment and fiscal consolidation indicators. The fundamental business cycle theory, Keynesian doctrine, and classical and neoclassical theory argue that fiscal policy positively affects employment. However, classical and neoclassical theory holds that the effects of expansionary fiscal policy are ineffective in the long run. Findings from the Johansen Cointegrating test indicate the number of cointegrating equations to be tested in the VECM. Because two cointegrating equations were found in the Trace test and 1 in the Max-Eigen test, two cointegrating equations will be tested under the VECM.

Model 3 was tested for cointegration between inequality and fiscal consolidation measures, including government expenditure, government revenue, government debt, and budget balance. The trace and Max-Eigenvalue test results indicate three cointegrating equations at the 0.05 significance level. Therefore, we reject the null hypothesis that there is no cointegration between inequality and fiscal consolidation measures. Three cointegration equations are tested under VECM.

Table 3 presents the results of the Johansen Normality Test conducted within the VECM framework, reported across all four estimated models.

Model 1 presents the results of the Johansen normalised test on the impact of fiscal consolidation indicators on GDP growth. The results indicate that government expenditure and the budget balance positively affect GDP growth, whereas tax revenue and government debt negatively affect it. Wagner’s theory of government expenditure posits that economic growth is positively influenced by government spending. Keynes’s theory also supports this argument; it holds that economic growth depends on government expenditure. Governments use expenditure to stimulate economic growth because more government capital is required in the early stages of economic development. The government uses expenditure to meet and achieve macroeconomic objectives, one of which is economic growth (Leshoro 2020; Lojanica 2015; Oladele, Mah & Mongale 2017). However, studies by Molefe and Choga (2017), Masipa (2018), and Buthelezi (2023) found that increased government expenditure has detrimental effects on economic growth in South Africa. These findings align with the Classical view, which holds that government expenditure harms economic growth. Although an increase in government expenditure can be targeted to stimulate GDP growth, from a fiscal consolidation perspective, it may not help to reduce the budget deficit or government debt. Studies by Isiaka, Mihailov and Razzu (2025) and Sidek (2021) found that improvements in economic growth are associated with successful fiscal consolidation. Reducing the budget deficit and government debt through adjustments in government expenditure and tax revenue is expected to increase economic growth. Decreasing government expenditure may not be an effective strategy for reducing the budget deficit and government debt if government expenditure is positively correlated with GDP growth. Government expenditure in South Africa has a detrimental effect on economic growth because it is not always directed towards projects that stimulate economic growth, and corruption arises from a lack of monitoring and evaluation in public finance management (Buthelezi 2023). From a fiscal perspective, if South Africa increases government expenditure in the short term and allocates funds to economic functionaries that stimulate long-term economic growth, while implementing strategies to reduce the likelihood of corruption, then government debt and the budget deficit may be reduced. According to Opperman (2023), the Free-Market Foundation advised the South African finance minister to cut government expenditure; South Africa needs to reduce the number of cabinet members and discretionary portfolios.

A positive budget balance has a positive impact on GDP. The budget balance becomes positive if tax revenue exceeds government expenditure, and vice versa. The functional finance theory posits that when the government collects more substantial revenue, the funds can be used to finance government expenditures or repay government debt (Lerner 1943). Both of these actions result in funds being allocated to stimulate economic growth. The challenge of increasing the budget deficit stems from governments’ inability to generate sufficient revenue to balance government expenditure (Bai, Hsieh & Song 2016; Bureau 2019; Picanço et al. 2018; Pugliese & Bennenbroek 2019). Governments use tax collection to finance government expenditure, and the inability to generate sufficient tax revenue negatively affects macroeconomic objectives (Moyo et al. 2021; Tala 2024; Tendengu et al. 2022). From a fiscal perspective, reducing the budget deficit can be achieved by hiring additional government employees, thereby increasing revenue through capital investments. If more people can be trained with the skills required to enter the labour market and create more jobs, the government can balance expenditures with taxes.

The findings of this study also showed that, in the long run, tax revenue has a negative impact on GDP. Tax revenue may threaten GDP if tax rates increase. Buchanan et al. (1978) argued that increased taxation results in decreased government spending because taxpayers are subject to fiscal illusion. Reduced government spending implies that fewer funds are allocated to achieve macroeconomic objectives. According to Solow (1956), tax policy impacts economic growth by discouraging entrepreneurial activity and investment, distorting investment decisions, discouraging work effort, and preventing workers from acquiring skills. However, a study by Ali, Yassin, and Mohamed (2018) found that tax revenue positively affects economic growth. Tax revenue can only reach its full economic potential if the government develops and supports fiscal laws and legislation aligned with macroeconomic objectives, thereby deterring tax evasion, corruption, and tax avoidance. According to the expenditure-taxation hypothesis, during recessionary periods, governments tend to increase government expenditure to restore confidence in the economy; however, this increase in government expenditure should be accompanied by a corresponding increase in the tax rate (Peacock & Wiseman 1979). These measures will improve tax management and enhance the accountability and transparency of government officials in tax revenue collection. Therefore, from a fiscal consolidation perspective, tax revenue can be targeted to reduce the budget deficit and government debt. The state must raise tax rates and strengthen tax administration.

Lastly, the findings indicate that government debt has a negative long-term impact on GDP. Zondi and Robinson (2021) found that in the short run, government debt has a weak positive impact on economic growth. However, in the long run, government debt does not Granger-cause economic growth, and the effect is negative. According to Ndoricimpa (2020), low government debt stimulates economic growth. In contrast, high government debt impedes it in the long run, as it leads to a larger budget deficit that crowds out private investment. Many researchers have asserted that government borrowing reduces economic growth, an effect that can be better understood through the crowding-out effect (Baaziz et al. 2015; Bilan & Ihnatov 2015; Daka et al. 2017). The functional finance theory posits that the government can borrow funds only if it wants the public to hold more government bonds and spend less on private consumption (Lerner 1943). Private consumption is the most significant component of GDP, so a decrease in private consumption reduces GDP. However, Buchanan’s Modern Theory of Public Debt, developed in 1958, acknowledged public debt as a means to encourage the development of institutions that contribute more to national savings, such as insurance companies, stock markets, capital markets, and banks (Buchanan et al. 1978). The expenditure, tax revenue, and budget balance coefficients are statistically significant at the 5% level, and the government debt coefficient is statistically significant at the 10% level. Therefore, from a fiscal consolidation perspective, government debt can be targeted to promote fiscal discipline by increasing government expenditure. A study by Buthelezi (2023) found that fiscal consolidation reduces the debt-to-GDP ratio in the long run. The study by Caldas-Montes, Bastos and De Oliveira (2019) found that fiscal transparency improves fiscal credibility in government expenditure, thereby reducing public debt. These findings align with the evidence from Arbatli and Escolano’s (2015) study, which found that transparency in fiscal management is associated with a low debt-to-GDP ratio. Highly indebted governments are reportedly less effective (Montes & Paschoal 2016). Therefore, the null hypothesis of no cointegration between economic growth and fiscal consolidation indicators is rejected.

The findings from Model 1 align with the ‘Debt levels and macroeconomic outcomes: Stylised facts’ section stylised facts, which note that South Africa’s low growth is accompanied by rising government debt and a budget deficit. Low economic growth and constrained fiscal balance are associated with negative impacts on tax revenue and government debt in the model. Furthermore, government expenditure had a positive impact, as reflected in increased public spending; however, its effectiveness depends on the efficiency of allocation.

Model 2.1 and Model 2.2 present results for Johansen’s normalised test of the impact of fiscal consolidation indicators on employment. In contrast, Model 2 focuses on public-sector employment, while Model 2.2 focuses on private-sector employment. According to Model 2.1, government expenditure and debt have a negative impact on public-sector employment in the long run. These findings imply that, ceteris paribus, if government expenditure decreases, public-sector employment will increase, and vice versa. The existing literature acknowledges that advanced economies reduce government expenditure to attract job creation and economic growth. In contrast, a reduction in government expenditure in developing countries leads to increased inequality, slower growth, and higher unemployment (Chugunov et al. 2021; Kim et al. 2021; Poku et al. 2022). The functional finance theory, as maintained by Keynes, posits that increasing government spending increases aggregate demand, thereby stimulating employment creation (Lerner 1943).

When government debt increases, more funds must be allocated to debt service, reducing funds available for other economic functions, such as acquiring the skills required to enter the labour market and job creation, ceteris paribus, and vice versa (Poku et al. 2022). However, the Ricardian Equivalence theory argues that government debt or borrowing has no negative impact and helps governments to achieve their macroeconomic objectives (Ricardo 1821). Furthermore, the findings also showed that tax revenue and budget balance have a positive effect on public sector employment. These results imply that if tax revenue and the budget balance increase, then public-sector employment will increase, ceteris paribus, and vice versa. If tax revenue increases, government spending will increase, enabling the state to achieve macroeconomic objectives. These findings are supported by Friedman’s (1978) tax-and-spending hypothesis, which posits that a tax increase leads to increased government expenditure and the achievement of macroeconomic objectives, such as full employment. The coefficients for government expenditure, debt, and budget balance are statistically significant at the 10% level, and that of tax revenue is statistically significant at the 5% level. Therefore, the null hypothesis of no cointegration between Gini and fiscal consolidation indicators is rejected.

According to Model 2.2, the findings indicate that only government expenditure has a positive long-term relationship with private-sector employment creation. Tax revenue and the budget balance negatively affect private-sector employment creation in the long run. These results align with the assumptions of Arthur Laffer’s 1974 curve model. The functional finance theory posits that an increase in taxation indirectly affects employment by reducing household consumption. This component is one of the most significant contributors to GDP (Lerner 1943). When GDP decreases due to a decline in private consumption, the economy is in a recession, during which people lose jobs, and the government is unable to finance its macroeconomic objectives (e.g. full employment). Laffer (1974) also maintained that the challenge of increasing taxation discourages investment and results in tax evasion (Laffer 1974). A decrease in private investment implies a decline in private-sector employment. Tax evasion means that the government will receive less revenue than expected, resulting in reduced government expenditure in the next financial period. Lower government spending has a negative impact on macroeconomic objectives. The coefficients for government expenditure and government debt are statistically significant at the 5% level, and those for tax revenue and the budget balance are statistically significant at the 1% level. Therefore, the null hypothesis of no cointegration between Gini and fiscal consolidation indicators is rejected.

The findings from Model 2 indicated that South Africa’s weak labour market performance does not depend solely on fiscal policy, as an expansion in government expenditure does not stimulate employment. The results indicate that structural challenges in the labour market may be explained by the fact that fiscal consolidation tends to affect sectors differently, as reflected in divergent results across public and private sector employment.

Model 3 presents the results of the Johansen normalised test of the impact of fiscal consolidation indicators on inequality (Gini). Equality is one of the macroeconomic objectives. The results indicate that government expenditure has a negative long-term correlation with inequality. In other words, if government expenditure increases, inequality tends to decrease, and vice versa. Isiaka et al. (2025) and Sidek (2021) supported these findings. Tax revenue and government debt are positively associated with inequality in the long run. An increase or decrease in tax revenue and government debt is associated with an increase or decrease in inequality. An increase in tax revenue, whether because of a higher tax rate or reduced government expenditure, is associated with greater inequality. Studies by Brinca et al. (2021), Furceri et al. (2022), and Heimberger (2020) confirmed these findings. However, a study by McManus et al. (2021) found that tax-based fiscal consolidation, such as increasing the value-added tax, increases inequality. In contrast, if implemented through personal and corporate income taxes, it improves equality. The coefficients for government expenditure, tax revenue, and budget balance are statistically significant at the 1% level, and that of government debt is statistically significant at the 5% level. Therefore, the null hypothesis of no cointegration between Gini and fiscal consolidation indicators is rejected. In summary, the results align with South Africa’s high level of Gini coefficient. Furthermore, the expansion of social grants in South Africa confirms that government expenditure is employed as a strategy to reduce inequality. Lastly, the positive results for tax revenue, government debt, and inequality highlight that tax-based fiscal consolidation can negatively impact low-income households.

In addressing South Africa’s socio-economic challenges, the results highlighted crucial policy implications: when pursuing fiscal consolidation, fiscal discipline must be balanced with inclusive growth objectives. Given these findings, the following recommendations are made:

Future studies should consider measuring thresholds for each fiscal consolidation variable relative to the targeted levels of key macroeconomic variables.