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

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  • Kagiso Molefe
  • Ireen Choga

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.

Suggested Citation

  • Kagiso Molefe & Ireen Choga, 2017. "Government Expenditure and Economic Growth in South Africa: A Vector Error Correction Modelling and Granger Causality Test," Journal of Economics and Behavioral Studies, AMH International, vol. 9(4), pages 164-172.
    • Handle: RePEc:rnd:arjebs:v:9:y:2017:i:4:p:164-172
    DOI: 10.22610/jebs.v9i4(J).1831
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    1. Pak Hung Mo, 2007. "Government Expenditures and Economic Growth: The Supply and Demand Sides," Fiscal Studies, Institute for Fiscal Studies, vol. 28(4), pages 497-522, December.
    2. Adi Brender & Allan Drazen, 2008. "How Do Budget Deficits and Economic Growth Affect Reelection Prospects? Evidence from a Large Panel of Countries," American Economic Review, American Economic Association, vol. 98(5), pages 2203-2220, December.
    3. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(2), pages 407-443.
    4. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(1), pages 65-94.
    5. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    6. Jiranyakul, Komain, 2007. "The Relation between Government Expenditures and Economic Growth in Thailand," MPRA Paper 46070, University Library of Munich, Germany.
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    1. Hlongwane, Nyiko Worship & Daw, Olebogeng David & Sithole, Mixo Sweetness, 2023. "Renewable electricity generation and government expenditure on economic growth of South Africa and Botswana," MPRA Paper 116497, University Library of Munich, Germany, revised 24 Feb 2023.

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