The effectiveness of fiscal policy actions on economic growth: a vector error correction model and causality econometrics analysis of South Africa

Abstract

This study examined the effectiveness of fiscal policy actions in South Africa on economic growth. The investigation was carried out using both the descriptive statistics and VECM. The time-series data of the period 1990 to 2019 was employed in this study, to analyse the economic variables that included, economic growth rate (real Gross Domestic Product (GDP)), gross fixed capital formation, aggregate government expenditure, revenue and public debt. The presence of a long-run equilibrium relationship among variables was revealed in the VECM results. Government expenditure was found to have a negative and significant impact on economic growth. Meanwhile, the regression results of both public debt and gross fixed capital formation variables displayed favourable significant effects on economic growth in the long-run. Although government revenue showed a negative impact in the long run, the variable was found not to be statistically significant. Therefore, this current study recommends that the government of South Africa should avoid exploiting resources when spending on social consumption but concentrate more on directing these expenditures to improve production, technological development and infrastructure which increases investments, attracts tourists and ultimately, boosts economic growth.