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

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.

Relationship between Public Expenditure and Economic Development in Sub- Saharan Africa Countries: The VECM

“…These findings are in contrast with the Keynesian Macroeconomic Theory probably because the budget structure of the Tanzanian economy comprises hugely by the recurrent expenditure and not development expenditure. This situation is also witnessed in other countries such as South Africa and Nigeria, see (Molefe andChoga, 2017 andOlayungbo andOlayemi, 2018) who investigated the relationship between public expenditure and economic growth, and in accord with the position of the Barro (1990) perspective in his Endogenous Growth Model that, public spending on investments and productive activities should have a positive economic impact, but public spending on consumption is anticipated to inhibit growth because a bigger part of consumer spending is allocated to non-growth aims like redistribution and social welfare.…”

“…In this instance, it is necessary to analyze the influence of government spending on economic growth, particularly in emerging nations. Molefe (2017) examined the link between government spending and economic development in South Africa from 1990 to 2015 using the Vector Error Correction Model and Granger Causality approaches. The study's findings demonstrated a negative long-run link between government spending and South African economic development.…”

An empirical analysis of public debt and government expenditure in South Africa

“…The restricted vector autoregressive (Molefe & Choga, 2017) are the inverse roots of the AR characteristic polynomial test that show the model is stable. The results of this test would be made with E-views on the AR root graph, which shows the circle with dotted lines; if dots are within the circle, which means the model is stable.…”

Fiscal Deficits and Interest Rates in Brics Economies: Testing the Keynesian-Ricardian Opposition

“…Such schools of thought are the conventional Keynesian view and the Ricardian deficit neutrality. According to Molefe and Choga (2017), the conventional Keynesian view supported fiscal deficits as one of the indispensable fiscal policies to enhance aggregate demand, since increasing interest rates would fail dismally. According to Keynes (1937), an economy with no government intervention would collapse as it was evident during the 1939 Great Recession.…”