It is beyond doubt that South Africa moved into a period of countercyclical policy in response to the global recession that began in the US housing and financial sectors in 2008. Figure 1 shows total real government expenditure in 2005 Rand and as a percentage of GDP. Note that from 2008 the proportion of government spending to GDP increased rapidly from 18.5% to 21.5% in 2011. This was due in part to negative growth in GDP over the period and in part to deliberate increases in spending by the treasury (Manuel 2009:11). Despite declining tax revenue due to the downturn, real expenditure continued to increase at a steady rate from 2008 to 2011. Figure 2 shows the growing budget deficit over the period, a reversal of the gains made throughout the previous decade. The crisis hit at a time when a headline budget surplus of near 1% had been realized. This was quickly reversed as the extent of the crisis became apparent, hitting a low of 5.5% in 2010 and remaining high at 4% in 2011. South Africa's total debt stood at 29.2% of GDP at the end of 2011 (SARB, 2012:1). This is less than the 41% in 2001 and is respectable by international standards. The USA for instance had total indebtedness in 2011 of 94% of GDP, Greece 165% and Japan 220%. First the responsiveness of the GDP growth rate to the fiscal stimulus will be analyzed. Conventional theory divides the effects of increased government spending into two components. This first is the direct contribution of government outlays to national income via public service wages and transactions for goods and services rendered. The second is the consumption effect that follows the initial outlay. Government spending is multiplied by a consumption effect when it maps to GDP.
In the period 2001 to 2007, GDP grew at an increasing and relatively stable rate. In 2007 growth began to slow, and in 2008-2009 GDP growth reversed into full decline, with the economy shrinking by a total of 1.
