An investigation of the relationship between economic growth and government expenditure : the case of South Africa

Abstract

The issue of whether government expenditure helps or hinders economic growth is still debatable. There are differences among policy makers on whether an increase in government expenditure helps or hinders economic growth. This study investigates the relationship between economic growth and government expenditure in South Africa using annual data spanning from 1980 - 2014. The Vector Error Correction Model and the impulse response function were used to analyse the data. The Vector Error Correction Model is used to estimate the relationship between the variables of this study while impulse response function is used to examine the response of shocks on the variables. The VECM results indicate a significant and negative relationship between GDP and expenditure. A positive and insignificant relationship was found between investment and GDP, and a significant and negative relation exists between GDP and money supply. The impulse response results revealed that GDP responds positively to shocks from the variables in this study. Based on the findings, there is a negative relationship between government expenditure and economic growth in South Africa during the period of study. Therefore, based on this result, it is recommended that government should focus on and direct more spending to priority sectors of the economy such as infrastructural development and industry in order to accelerate economic growth. Both private and government investors should be encouraged since investment showed a positive relationship but insignificant. Monetary policy should be used as an instrument to control money supply in the economy.