The Impact of Government Spending on Economic Growth: Case South Africa

Abstract

This study investigates the validity of the Keynesian macroeconomic framework and the Classical perspective of a long run relationship and causality between government expenditure and economic growth in South Africa using the quarterly data from 1990-2010. A specific country study was used to investigate the long-run relationship between the former and the later on nation’s output. Testing for unit roots and co-integration was performed first before we engage in ganger causality for testing the causality relationship between government spending and growth. Unit root tests were conducted so as to avoid the generation of the spurious regression results and co-integration determines the existence of a long run relationship among the variables. ADF(Augmented-Dickey Fuller) and the Philips-Perron tests techniques were engaged to test for stationarity. This study applies the Johansen Maximum Likelihood test techniques using both the trace technique and the more powerful eigen maximum value test. Both procedures found that certainly a long run relationship exists between government spending and growth in South Africa. Using the results obtained from the study, increased government spending in South Africa has not led to a meaningful development of the economy of the country which is inconsistent of the Keynesian stance.

DOI: 10.5901/mjss.2014.v5n1p109