South Africa needs more than disciplined fiscalpolicy to increase its savings rate

While it is good news that prudent fiscal policy has translated into positive and rising government savings levels from 1996 onwards, new academic research has found that this has failed to stimulate saving in the private sector.

The findings are published by the Cape Town-based Economic Research Southern Africa (ERSA), in National Saving and Fiscal Policy in South

Africa: an Empirical Analysis.

Using data going back to 1970, author Lumengo Bonga-Bonga shows that a positive fiscal shock improved fiscal discipline results in a reduction in private-sector saving in the short term; he defines the short term as a period lasting less than six years.

Whats more, the savings gains made by government during times of heightened fiscal discipline are outweighed by these declines in private-sector savings. The net effect is a decline in national savings in the short term.

Bonga-Bonga finds that, over the long term, national savings do not react to fiscal policy shocks.

An examination of South Africas savings behaviour confirms that the national savings trends seem to be driven by the movement in private-sector savings: despite the pick-up in government savings from 1996, national savings continued along a declining trajectory, in line with falling savings in the private sector.

The results of Bonga-Bongas research into the response of private savings to fiscal policy contradict the findings of similar studies in developed economies: In a number of developed countries, the decline in private-sector savings in response to a positive fiscal shock was smaller than the savings gains made by government. In these cases, then, increased fiscal discipline improved national savings levels.

It is generally agreed that improved savings will help lift South Africa onto a higher-growth trajectory. As Bonga-Bonga points out, low savings hinder investment-driven growth over the medium term and creates a dependence on foreign capital inflows.

Bonga-Bonga concludes that fiscal discipline is an important aspect of improving national savings levels. But, since the empirical evidence shows that fiscal policy fails to stimulate private and national savings in South Africa, a broader and stronger policy response is needed.