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1. Introduction
The intent of fiscal policy is essentially to stimulate economic and social development by pursuing a policy stance that ensures a sense of balance between taxation, expenditure and borrowing that is consistent with sustainable growth. However, the extent to which fiscal policy engenders economic growth continues to attract theoretical and empirical debate especially in developing countries. The debate has recently been given more impetus in South Africa as the unions and the communist party argue that the fiscal policy direction since the new democracy in 1994 has to make way for a more interventionist approach. The basis of that agitation is due to the argument that the seemingly steady growth that has been recorded over the past decade has provided a low number of jobs. Indeed, over the period 1995-2008 real gross domestic product (GDP) grew at a rate of 3.6 per cent per year. This period has also been characterised by a more open economy as the country shed its pariah-state status and deepened her integration in the global market.
In addition to the fiscal restraint pursued, the economic policy was largely pro-market with reduced intervention and a considerable measure of deregulation as compared to the pre-1994 era. The fiscal restraints notwithstanding huge efforts have been made to provide transfers to poor households, to the extent that nearly 27 per cent of the population (13 million) presently receive some form of grant. These post-1994 transfers include child support, old age pensions, disability, dependence care and foster care grants. The grants constitute a sizeable proportion of government expenditure; for instance, they represent 12 per cent of total government spending in the 2009/2010 financial year ([24] Republic of South Africa, 2009)[1] . While government consumption expenditure is largely seen as unproductive, social grants in South Africa, given its history, have clear welfare implications. These positive welfare implications can have a possible favourable effect on long-term growth.
On the theoretical front, however, there are two main strands in the literature regarding the role fiscal policy plays in fostering economic growth. One view is that government's support for knowledge accumulation, research and development, productive investment, the maintenance of law and order and the provision of other public goods and services can stimulate growth in both the...