Fiscal Policy and Unemployment in South Africa: 1980 – 2010

Abstract

Unemployment is one of the most topical challenges facing South Africa. Like most developing countries, South Africa has been using the fiscal policy framework as a tool to alleviate the high rates of unemployment. Despite the government’s tremendous effort to influence economic behaviour using an expansionary fiscal policy framework, unemployment has remained a challenging phenomenon in South Africa This study examined the impact of fiscal policy on unemployment in South Africa using annual time series data for the period 1980 to 2010. A vector error correction model was used to determine the effects of fiscal policy aggregates on unemployment in South Africa. Results from this study revealed that government consumption expenditure and tax have a positive impact on unemployment while government investment expenditure negatively affects unemployment in South Africa. The study recommends the South African government to reduce the corporate tax rate from 28 per cent to figures below 20 per cent as adopted by other OECD countries Policy recommendations were made based on these results. DOI: 10.5901/mjss.2013.v4n6p579