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

  • Kagiso Molefe School of Economic Sciences, North West University
  • Ireen Choga School of Economic Sciences, North West University
Keywords: Government Expenditure, Economic Growth, National Savings, VECM, South Africa

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.

Downloads

Download data is not yet available.

References

Barro, R. J. (1990). Government spending in a simple model of endogenous growth. Journal of Political Economy, 98(1), 103-125.
Barro, R. J. (1991). Economic growth in a cross-section of countries. The Quarterly Journal of Economics, 106(2), 104-443
Buiter, W. H. (1975). Crowding out and the effectiveness of fiscal policy. Econometric Research Program, Research memorandum, 191.
Brender, A. & Drazen, A. (2008). How Do Budget Deficits and Economic Growth Affect Reelection Prospects? Evidence from a Large Panel of Countries. American Economic Review, 98(5), 2203-2220.
Chipaumire, G., Ngirande, H., Method, M. & Ruswa, Y. (2014). The impact of government spending on economic growth: case South Africa. Mediterranean Journal of Social Sciences, 5(1), 109 – 118
Gallaway, L. & Vedder, R. (1998). Government and unemployment: Reply to De Long. Critical Review, 12(3), 253-264.
Kesavarajah, M. (2012). Wagner’s Law in Sri Lanka: An Econometric Analysis. International Scholarly Research Network, Article ID 573826, 9 pages.
Keynes, J. M. (1936). The General Theory of Interest, Employment and Money, London: Macmillan.
Komain, J. & Brahmasrene, T. (2007). The Relationship between Government Expenditures and Economic Growth in Thailand. Journal of Economics and Economic Education Research, 8(1), 93-102
Landau, D. L. (1983). Government expenditure and economic growth: a cross-country Study. Southern Economic Journal, 49(1), 783-792
Lutkepohl, H., Saikkonen, P. & Trenkler, C. (2001). Maximum eigenvalue versus trace tests for the cointegration rank of a VAR process, 4(2), 257-310.
Mulamba, K. C. (2009). Long-run Relationship between Government Expenditure and Economic Growth: Evidence from SADC Countries: (unpublished PhD Thesis, University of Johannesburg, 2009).
Mo, P. H. (2007). Government expenditure and economic growth: the supply and demand sides. Fiscal Studies, 28(4), 497-522
National Treasury. (2015). National Budget Review. [Online] available from http://www.treasury.gov.za/documents/nationalbudgetreview [25 February 2015]
Olulu, R. M., Erhieyovwe, E. & Andrew, U. (2014). Government Expenditure and Economic growth: The Nigerian Experience. Mediterranean Journal of Social Science, 10(1), 89-94
Pieroni, L. (2009). Military expenditure and economic growth. Routledge, Defence and Peace Economics, 20(4), 327-339
Solow, R. (1956). A Contribution to the Theory of Economic Growth. Quarterly Journal of Economics, 70(1), 65-94.
Verna, S. & Arora, R. (2010). Does the India Economy support Wagner’s Law? An Econometric Analysis. Eurasian Journal of Business and Economics, 5(2), 77 – 91.
Wagner, A. (1877). Three Extracts on Public Finance, translated and reprinted in R.A. Musgrave and A.T. Peacock (Ed), Classics in the Theory of Public Finance, London: MacMillan.
Published
2017-09-04
How to Cite
Molefe, K., & Choga, I. (2017). Government Expenditure and Economic Growth in South Africa: A Vector Error Correction Modelling and Granger Causality Test. Journal of Economics and Behavioral Studies, 9(4(J), 164-172. https://doi.org/10.22610/jebs.v9i4(J).1831
Section
Research Paper