Public Expenditure and Economic Growth in South Africa: Long Run and Causality Approach

Abstract

This study examined the long run and causal relationship between public expenditure and economic growth in South Africa from 1980 to 2014. The authors employed co integration test, vector error correction mechanism and Granger causality test in estimation of the variables specified in the regression model. The results from the estimations indicated a stable long run relationship between the dependent and independent variables, a negative insignificant relationship between total government expenditure and economic growth, a positive significant relationship between economic growth and total revenue, and significant positive relationship between inflation and economic growth. The pair wise Granger causality showed a one way causality running from national income (RGDP) to total government expenditure in confirmation of the application of Wagner’s theory in the economy. In view of the above results the study concludes that a stable long run relationship exists between public expenditure and economic growth in South Africa within the period of the study and that the growth in national income leads to increase in government expenditure as implied by Wagner’s hypothesis in South Africa. The study consequently recommends a conscious strategy by the South Africa fiscal authorities aimed at increasing the growth of the economy by increasing internally generated revenue.