Computerised general equilibrium (CGE) modelling of the impact of fiscal policy on economic growth, income redistribution and poverty alleviation in South Africa

D.Comm.This thesis endeavoured to assess whether the government can simultaneously achieve the objectives of sustained economic growth, income redistribution and fiscal discipline, as stated in the Growth, Employment and Redistribution (GEAR) policy. The simultaneous realisation of these objectives of the GEAR policy brings about controversies between the South African government and other interest groups, such as the trade unions and some academics. Empirical analysis such as econometrics and computerised general equilibrium (hereafter referred to as CGE) techniques were used in an attempt to solve the research question. The Kalman filter technique was applied to model total factor productivity and to establish the link between social services expenditure and economic growth in South Africa. The structural vector autoregressive (SVAR) technique was applied to assess the dynamics of fiscal shocks on output growth and determine the type of taxes that are distortionary in financing the increase in social services expenditure. The study’s main contribution is the application of the CGE technique to assess whether the above three objectives can be reached simultaneously. A new CGE model was built, based on the standard CGE model by Thurlow and Van Seventer (2002). In the new CGE model, some taxes were changed to endogenous variables instead of exogenous variables or parameters as in the standard model. The model introduced a number of government macro closure rules to clear the government balance. The research lead to the following conclusion: When constraints on employment are removed across all the labour categories in South Africa, and the government uses compositional shift of its expenditure to finance the continual increase in social services expenditure, the three objectives, namely fair redistribution of iv income, fiscal discipline and sustained economic growth, will be reached simultaneously. It is recommended that the government fix conditions in the labour market to remove impediments to employment in South Africa (such as lack of appropriate skills for specific activities), as this will enable the government to achieve most of its objectives