Government Expenditure and Economic Growth in South Africa: A Vector Error Correction Modelling and Granger Causality Test

Ireen Choga,Kagiso Molefe

doi:10.22610/jebs.v9i4.1831

Abstract

Previous studies generally find mixed empirical evidence on the relationship between government spending and economic growth. This study re-examine the relationship between government expenditure and economic growth in South Africa for the period of 1990 to 2015 using the Vector Error Correction Model and Granger Causality techniques. The time series data included in the model were gross domestic Product (GDP), government expenditure, national savings, government debt and consumer price index or inflation. Results obtained from the analysis showed a negative long-run relationship between government expenditure and economic growth in South Africa. Furthermore, the estimate of the speed of adjustment coefficient found in this study has revealed that 49 per cent of the variation in GDP from its equilibrium level is corrected within of a year. Furthermore, the study discovered that the causality relationship run from economic growth to government expenditure. This implied that the Wagner’s law is applicable to South Africa since government expenditure is an effect rather than a cause of economic growth. The results presented in this study are similar to those in the literature and are also sustained by preceding studies.

Highlights

Expenditure by government is still regarded as one of the major elements of economic growth in both advanced and emerging countries
Since the Augmented Dickey-Fuller (ADF) and Phillip Perron (PP) techniques confirmed that variables are integrated of same order I (1), the paper can proceed to conduct a lag length selection test to establish the number of lag to employ in the analysis
The main objective of this paper was to examine the nature of the relationship between government expenditure and economic growth in South Africa using annual data covering the period 1990 to 2015

Summary

Introduction

Expenditure by government is still regarded as one of the major elements of economic growth in both advanced and emerging countries. According to Wagner (1877), government expenditure will remain a source of economic growth and a tool to improve the welfare of most societies in emerging economies. He further emphasized that sustained government expenditure will result in jobs creation, improved physical infrastructure, increased educational investment as well as sustained economic growth. In South Africa, government expenditure was reduced from 27.6 per cent to 26.4 per cent of GDP following the inauguration of the democratic governance in 1994 This was a good indication that the government in power was taking the correct path in addressing the errors of the past regime. The government was addressing economic challenges which were bought by the 2008/2009 global economic meltdown

Objectives

Results

Conclusion