ECONOMIC GROWTH MODELS AND GOVERNMENT EXPENDITURE IN SOUTH AFRICA: A DISAGGREGATED IMPACT ANALYSIS

Year 2019, Volume: 11 Issue: 1, 33 - 48, 17.06.2019

İfeoma Anthonia Iwegbunam Zurika Robinson

https://doi.org/10.34109/ijefs.201911103

Cited By: 4

Abstract

This study examined the effects of government expenditure on different components of
economic growth in South Africa. The six key policy variables employed in the analysis
were derived from the Solow neoclassical growth model and the New Growth Path
(NGP), a macroeconomic framework designed to address the main challenges
(unemployment, poverty and inequality) facing the economy as a result of its political
past. The analysis of the relationship was carried out using the cointegration model, longrun estimates and the VECM, because assessing the effects of government expenditure on
economic growth goes beyond the short-term period, due to the fact that it takes time
before government outlays have an effect on the economy. The findings from the analysis
revealed that though there exists a long-run equilibrium relationship among the variables
with the cointegration results, the long-run estimates showed that aggregate private
consumption expenditure and employment-to-population ratio are significantly, but
negatively, related to economic growth, while net inflows of foreign direct investment
and gross fixed capital formation are negatively related to gross government expenditure.
This implies that government needs to direct most of its spending towards human
capital development, in order to overcome the challenges. However, government
expenditure needs to be monitored, since excessive public capital expenditure might
reduce the positive impact of foreign direct investment on economic growth. The
study therefore suggests that government should consider increasing its expenditure on the significant variables that support labour and capital development, in order to
enhance economic growth in South Africa.

Keywords

Government expenditure, economic growth models, government policy, VECM, South Africa

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