Impact of fiscal expansion in South Africa – the case of the Eastern Cape Province

Aim/purpose – Diagnostics of fiscal challenges facing the Eastern Cape Province’s (one of the nine South African provinces) economy reveals a reduction in the number of tax payers, a decrease in the Eastern Cape revenue share, a growing government expenditure but declining revenue, low growth path, high levels of unemployment, poverty and income inequality. To address these challenges, fiscal policy-makers endorsed efficiency in government revenue collection which, if well managed, will increase revenue by 1.5 percent. This study seeks to investigate the impact of fiscal expansion in the Eastern Cape economy. Design/methodology/approach – This study uses the Social Accounting Matrix (SAM- -Leontief Model) to assess the impact of efficiency in revenue collection in the Eastern Cape Province. The model provides demand-side tax multipliers. The methodology used to develop the SAM database is in line with the most recent 2008 System of National Accounts (SNA) released by the United Nations (SNA 2008) and international best practices. Findings – Tax micro-simulations results indicate that an additional R 1 (one Rand) in the fiscus will have positive impact on economic growth, employment creation, poverty reduction and income inequality. Research implications/limitations – SAM is described as the presentation of SNA accounts in a matrix which elaborates the linkages between the Supply and Use Tables and institutional sector accounts. In many instances, SAMs have been applied to an analysis of interrelationships between structural features of an economy and the distribution of income and expenditure among household groups. The limitation of the model is that it assumes constant return to scale and full employment. Nonetheless, SAM is the economic tool, best when used as a database for a computable general equilibrium model. Originality/value/contribution – The study recommends the use of this method for assessing the impact of regional economy on the entire country because it is a square matrix that quantitatively captures the transactions that occurred between the production sector, private (households), public (government) institutions, other factors, and the rest of the world. This technique is used for the first time to analyze the economy of the Eastern Cape Province in South Africa.