The impact of government social expenditure on economic growth in South Africa
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Date
2023
Authors
Setouto, Daniel Kabelo
Journal Title
Journal ISSN
Volume Title
Publisher
University of the Free State
Abstract
South Africa has been facing persistent socio-economic challenges, including high levels of unemployment, poverty, and income inequality. To tackle these issues, the government has allocated significant resources towards social spending programmes but socio-economic challenges have persisted. It is against this background that this study aims to examine the impact of different components of government social spending on economic growth in South Africa. The study investigated this relationship for the period 1985 to 2019 before the Covid-19 effects.
To establish the relationship between government social expenditure and economic growth, the study adopted the Johansen Cointegration Analysis and Vector Error Correction Model. This study further employed the Granger Causality test, the Variance Decomposition and the Generalised Impulse Response function to assess the causation, to trace the response of the dependent variable to shocks in the error term and the time path of the variables in numerous shocks. Government social protection, educational expenditure and health expenditure were used as the major components of government social expenditure.
The empirical results obtained in this study indicate that aggregate government expenditure, social protection expenditure and gross fixed capital formation have positive significant effects on the performance of the economy. This implies that an increase in these variables promotes economic growth. Conversely, government health expenditure adversely and significantly affects economic growth. Surprisingly, government educational expenditure was not statistically significant. Moreover, looking at the variance decomposition findings, the results indicate that although the changes in economic growth are influenced by aggregate government expenditure, government education expenditure and gross fixed capital formation shocks, in the long-run, its shocks largely contribute to the fluctuations of economic growth. In other words, the changes in economic growth are largely influenced by changes of the previous economic growth.
The results of this study underscore the critical role of government social protection expenditure in fostering long-term economic growth in South Africa. Accordingly, the results suggest that the government should prioritise and potentially increase investments in social safety nets and welfare programs, given the positive impact of social protection expenditure on economic growth. On the other hand, the adverse and significant effect of government health expenditure on economic growth warrants careful consideration. The findings suggest a need for a more efficient allocation of health resources or a revaluation of health expenditure policies to ensure that government spending in this sector aligns more effectively to promote and sustain economic growth. This could involve exploring ways to enhance the effectiveness of healthcare spending or identifying areas for improvement in the health sector to mitigate any negative impact on economic growth. The insignificance of government educational expenditure suggests a potential need for targeted reforms or enhanced efficiency in the educational sector to align it more closely with economic growth objectives. Overall, this study provides valuable insights for policymakers seeking to optimise the impact of social spending on economic growth in South Africa.
Description
Dissertation (MBA (Business Administration))--University of the Free State, 2023