Do fiscal deficits influence private savings in South Africa? An empirical note

Abstract

Orientation: The neoclassical loanable funds theory predicts that fiscal deficits reduce the pool of available savings in the economy, but heterodox scholarship disputes the claim. Research purpose: The paper sets out to test the relationship between fiscal deficits and private savings. Motivation for the study: Scholars are divided on whether corporate South Africa is building up excess savings, with some arguing that it is not and others arguing that it is because of mistrust of government and uncertainty largely. The trends of net private savings and fiscal deficits suggest that something contrary to the postulation of the neoclassical loanable funds theory could be happening in the South African context. Research approach/design and method: The paper used data for the period 1960–2021 within the Toda-Yamamoto vector autoregressive modelling framework. Main findings: The results show that fiscal deficits increase savings but reduce interest rates in line with the heterodox view that the financial asset creation effect of debt-financed deficits improves savings and reduces interests through the liquidity channel. Managerial/practical implications: The lesson for policy is that fiscal deficits are healthy for the economy. However, the government must manage them at some reasonable level to maintain a constant flow of net financial assets to the private sector, thus bolstering savings. An unhealthy pursuit of fiscal surpluses can shift deficits to households and firms, and breed systemic financial instability. Contribution/value-added: The paper contributed to a nuanced understanding of the role of fiscal deficits in expanding savings, which runs counter to the theoretical underpinnings of fiscal conduct that pursues budget surpluses.

Keywords

• fiscal deficit
• corporate savings
• household savings
• modern monetary theory
• loanable funds theory