The consequential effects of budget deficit on economic growth: a vecm analysis of South Africa

Abstract

This study was undertaken to examine the effects of budget deficit on economic growth of South Africa using the Vector Error Correction Model under the VAR framework. This study is relevant because recently, the rate of budget deficit in South Africa is high and it continues to pose risks to the economic outlook of the country. This study contributes to the debate of budget deficit reduction through measures such as fiscal consolidation and Austerity measures. To this end, the time series data set from the period from 1985 to 2015 was collected and analysed. The results of this study revealed that budget deficit is inversely related with economic progress in South Africa. The policy implication of this negative relationship is that an increase in budget deficit is detrimental to economic growth of a country. Furthermore, the study discovered that labour force participation and gross domestic investment remains the core elements that improve the economy in South Africa. Therefore, the government of South Africa should work together with private sectors, labourers and other stakeholders and should also reinforce austerity measures such as cost containment and fiscal consolidation without curtailing its priorities to ensure the effective promotion of economic growth in the country.