ECONOMIC GROWTH MODELS AND GOVERNMENT EXPENDITURE IN SOUTH AFRICA: A DISAGGREGATED IMPACT ANALYSIS

Abstract

This study examined the effects of government expenditure on different components of economic growth in South Africa. The six key policy variables employed in the analysis were derived from the Solow neoclassical growth model and the New Growth Path (NGP), a macroeconomic framework designed to address the main challenges (unemployment, poverty and inequality) facing the economy as a result of its political past. The analysis of the relationship was carried out using the cointegration model, longrun estimates and the VECM, because assessing the effects of government expenditure on economic growth goes beyond the short-term period, due to the fact that it takes time before government outlays have an effect on the economy. The findings from the analysis revealed that though there exists a long-run equilibrium relationship among the variables with the cointegration results, the long-run estimates showed that aggregate private consumption expenditure and employment-to-population ratio are significantly, but negatively, related to economic growth, while net inflows of foreign direct investment and gross fixed capital formation are negatively related to gross government expenditure. This implies that government needs to direct most of its spending towards human capital development, in order to overcome the challenges. However, government expenditure needs to be monitored, since excessive public capital expenditure might reduce the positive impact of foreign direct investment on economic growth. The study therefore suggests that government should consider increasing its expenditure on the significant variables that support labour and capital development, in order to enhance economic growth in South Africa.