Fiscal Deficits and Inflation: An Empirical Analysis from South Africa

Abstract

Purpose

The importance of fiscal considerations in elucidating the primary causes of inflation has received considerable attention. A well-known macroeconomic theory states that governments with ongoing budget deficits eventually must create money to cover them, which leads to inflation. This study examines fiscal deficits and inflation, using an empirical analysis from South Africa.

Methodology

The data from 1986 to 2021 was collected from the World Development Indicator (WDI, 2021). The ARDL econometric technique was used to test the nexus among the variables.

Findings

The study's findings show that the long-term fiscal deficit coefficient is positive and statistically significant. The long-term results support the expected sign that the budget deficit directly impacts inflation in South Africa. The coefficient (0.78) indicates that a percentage increase in the budget deficit will cause inflation in South Africa to rise by roughly 0.78%.

Conclusion

It is recommended that the government use less inflationary sources, such as the non-banking technique, to finance fiscal deficits during economic downturns. The study also suggests keeping the fiscal deficit at a manageable level to keep inflation under control in South Africa, which will lead to growth and lower inflation.