The Relationship between Fiscal Policy and Unemployment in South Africa

Abstract

South Africa has long been confronted by persistent and worsening unemployment. Since 1994, the democratic government has relied on fiscal policy to drive social development, to grow the economy and to alleviate high rates of unemployment. This research undertakes an empirical examination of the effect that fiscal policy has had on unemployment over the period from 1994 to 2021. The Autoregressive Distributed Lag (ARDL) technique together with other econometric methods are used for the analytic exercise. The estimated model comprises of unemployment rate as the dependent variable which is regressed onto fiscal policy variables in the form of government expenditure, government tax revenue, fiscal deficit, together with selected determinants of unemployment that serve as explanatory variables. The study results reveal that a long-run relationship exists between unemployment and the fiscal policy variables. The long-run relationship between unemployment versus tax revenue is found to be statistically insignificant however the relationship between unemployment and fiscal deficit is found to be significant. Tax is found to have a negative relationship with unemployment for both long-run and short-run cases. Government expenditure is determined as having an insignificant but positive effect on unemployment in the long- run, whilst for the short-run it is revealed as having a negative relationship with unemployment. Deficit is shown to have a positive effect on unemployment for both short-run and long-run cases, yet the short-run relationship is found to be insignificant. This result demonstrates that persistent fiscal deficits by South Africa have failed to achieve meaningful job-creation but worsening unemployment. Government expenditure is determined to be more efficient and effective as a short-run policy tool when compared to tax and fiscal deficit. The research arrives at the conclusion that the government’s fiscal policies, implemented since 1994, have been ineffective at addressing the challenge of unemployment. Policy recommendations are made with emphasis on the need for suitably designed policy tools and effective evaluation and efficient correction of policy plans