Do budget deficits crowd out private investment? An analysis of the South African economy

Abstract

South Africa has been experiencing unprecedented budget deficits since the 1960s, in light of this, the study investigates whether budget deficits crowd out or crowd in private investment in South Africa, using quarterly data covering the period 1994 to 2009. An empirical model linking private investment to its theoretical variables is specified and used to assess the quantitative effects of budget deficits on private investment. The study augments the cointegration and vector auto–regression (VAR) analysis with impulse response and variance decomposition analyses to provide robust long run and short run dynamic effects on private investment. The empirical results revealed that there is a long–term relationship between private investment and its determinants specified in the model. This implies that budget deficits significantly crowds out private investment in the long–run. These results corroborate the theoretical predictions and are also supported by previous studies.