Abstract
The study analysed the cyclical nature of fiscal consolidation in South Africa. More specifically, examined how government debt reacts to fiscal consolidation over business cycles. South Africa faces a growing public debt burden, low economic growth, high unemployment, and persistent inequality. To curb the escalating government debt and debt servicing costs, the government resorted to austerity measures or fiscal consolidation. Thus, this study attempts to investigate the efficacy of consolidation on debt reduction. To this end, we used data from 1998 to 2023 and employed the Markov Regime-Switching model and a Structural Vector Autoregression (SVAR) to achieve the objective of the study. The study found that the impact of consolidation varies over the business cycle. For instance, during expansion, the cyclically adjusted primary balance (CAPB) plays a vital role in reducing debt levels. Conversely, in recession, revenue-based consolidation proves more effective in debt reduction, but expenditure-based measures support economic recovery, albeit with increased short-term debt. Furthermore, the study underscores the importance of inflation control during economic expansions, as high inflation can undermine debt reduction efforts. The findings suggest that fiscal consolidation strategies in South Africa should be tailored to the prevailing economic regime, balancing debt sustainability with economic stability and growth.