The effects of government spending shocks on income distribution in South Africa

Abstract

PurposeThe main aim of this study is to examine the effect of government spending and its components' shocks on the distribution of income between labour and capital in South Africa for the period between 1994Q2 and 2019Q3.Design/methodology/approachThe effects of government spending shocks on income distribution are analysed using Jordà's (2005) local projection method. The shocks, however, are identified by applying short-run contemporaneous restrictions in a vector autoregressive model based on Cholesky identification scheme.FindingsThe results indicate that government spending shock has a positive and significant effect on labour share after the first quarter. This means that expansionary government spending has a paramount role in reducing income inequality in the economy. Both government investment and government consumption shocks have also contributed to a reduction in income inequality, though the magnitude effect is smaller for government consumption.Originality/valueResearch findings on the effects of government spending shock on income inequality are still inconclusive. Therefore, this research examines the effect of total government spending shock along with its components on labour income share for the South African economy.