Fiscal Sustainability and Interdependence of Primary Balance and Public Debt in South Africa

The main goal of this study was to evaluate sustainability of fiscal policy in South Africa, and assess the interdependence of primary balance and public debt, as ratios of gross domestic product, over the sample period 1997q4 to 2016q2. The Vector Error Correction (VEC) model was applied to estimate the fiscal reaction function using EViews program, while the VEC Granger-Causality/Block Exogeneity Wald test, impulse response functions and variance decompositions were applied to test for presence of interdependence between primary balance and public debt. Empirical results show strong evidence of consistency of government fiscal policy with the intertemporal budget constraint and interdependence between primary balance and public debt over the period under review. In implementing corrective fiscal adjustment measures to ensure fiscal sustainability, government should therefore consistently take into consideration the interdependency between primary fiscal balance and public debt profiles