Abstract
Direction of causality between government expenditure and output growth is pertinent for a developing country since a sizeable volume of economic resources is in the hands of the public sector. This paper investigates the Wagner's law in South Africa over the post-apartheid era, 1994-2015. This paper is unique to present studies since it uses disaggregated government expenditure and controls for structural breaks. The Granger non-causality test of Toda & Yamamoto, a superior technique compared to conventional Granger causality testing, is employed and this paper finds no support for Wagner's law. However, there is causality running from total government and education expenditures to output. This finding is in line with the Keynesian framework. It is recommended in the paper that the government should take an active role in promoting output growth through increases in education expenditures in particular.
Highlights
The government’s expenditure in South Africa hogged the limelight recently, with calls for fiscal consolidation amid a looming ratings downgrade
This paper presents evidence, on the direction of causation between South Africa's GDP and disaggregated government expenditure, which is more robust and reliable when compared to previous studies since this paper controls for structural breaks
The Gregory & Hansen and Johansen cointegration tests are used for reliability and robustness and it is established that there is no cointegration in all relationships tested for South Africa in the period of 1994-2015
Summary
The government’s expenditure in South Africa hogged the limelight recently, with calls for fiscal consolidation amid a looming ratings downgrade. None of the existing studies done on South Africa has controlled for structural break(s) in the data nor looked at disaggregated government expenditure for South Africa This leaves a void in the existing literature worth filling as suggested by Frimpong & Oteng-Abiye (2009). According to Frimpong & Oteng-Abiye (2009) there is a possibility that components of government expenditure could better explain GDP while total government expenditure itself does not Such a study, as this one, is critical in South Africa where the government is geared towards fiscal consolidation. The remainder of the paper is organized as follows: section 2 reviews theoretical and existing empirical literature; section 3 presents the data and methodology; section 4 presents the results and section 5 concludes the paper
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