The role of government spending on economic growth in a developing country

Abstract

The issue of whether government expenditure helps or hinders economic growth is still debatable. This study examines the contribution of government spending towards economic growth in South Africa using annual data from 1980 – 2014. The cointegration approach and Vector Error Correction Model were used to analyse the data. The cointegration test results indicate that there is long run relationship between government expenditure and economic growth in South Africa. The VECM outcome indicates a positive and significant link between economic growth and expenditure on the long run. There is a positive and significant relationship between exchange rate and economic growth and a significant and negative relationship between economic growth and private consumption. Based on these findings, the correlation between government expenditure and economic growth showed that there is positive relationship on the long run in South Africa, while there is a negative and significant relationship between government spending and economic growth on the short run. More spending should therefore be directed towards important sectors such as infrastructural development and industrial development in order to accelerate economic growth. There is also a need for fiscal policy to be used as an instrument to regulate the amount of money in the economy.