Examining Factors That Drive Government Spending in South Africa

Abstract

The structure of budgets has changed drastically in the past three decades both globally and locally. Most economies have consistently had growing government spending, some spending way more than what they earn especially following the aftermath of the global financial crisis. Literature shows that government spending in high-income countries has been more on social protection, while public servants compensation has dominated spending in many low-income countries, especially in Africa. In South Africa, a weak investment climate, established years of slow economic progress, rising unemployment and poverty levels which have negatively affected the tax base and therefore revenue collection. The country has been spending more money than it earns, to an enormous degree raising worries to research the drivers of this growth in expenditure, subsequently the essential objective of this study was to pinpoint the key factors that have added to this situation. The study adopted a quantitative research approach through the use of quarterly time series data spanning from 1995 through to 2018. An autoregressive distributed lag (ARDL) model was utilized so as to determine the long-and short-run impacts of the chosen variables on government spending. The findings of the study show that government spending in South Africa, particularly after 1994 has been driven more by current spending than capital spending which presents significant economic effects in the long-run. Among the most significant factors, explicitly in the short run, incorporate unemployment levels, rising debt and inflation. Results further revealed that political instability, low economic growth as well as a growing public size and bailouts of unproductive state owned entities (SOEs) induced significant long term consequences on spending. The continued worsening of spending patterns suggests the presence of fundamental obstacles including the country's high unemployment levels, for both adults and youth, inferring that the revenue base keeps on narrowing, while the growing poverty levels forces spending towards current spending such as the growing social welfare needs rather than productive activities such as investment spending. The study recommends that the size of the public wage bill be reduced and many unproductive SOEs be privatized to relieve spending. Additionally, a multidimensional approach is needed which entails the reduction of debt accumulation to have low interest repayments, restructuring the labour market to improve outcomes, expanding the revenue base, creating an environment conducive to private spending and economic growth and promoting a stable and transparent political climate.

Wealth Inequality in South Africa—The Role of Government Policy

“…Negative effects on democratic political systems include reduced regulation, decreased investment in infrastructure, and economic distortions that benefit the rich more than the poor (Nowatzki 2012;Bagchi and Svejnar 2015;Lusardi et al 2017;Tyler and Felix 2020). To reduce wealth inequality in South Africa, it is advised that governments should devote attention towards promoting good governance conducive to economic growth, restructuring the labour market, expanding the revenue base, increasing investment in education and physical infrastructure, reducing debt and the public wage bill, and privatising unproductive SOEs (Omilola and Akanbi 2014;Mdluli et al 2019).…”