Acta Universitatis Danubius. Œconomica, Vol 15, No 2 (2019)

Abstract

As South Africa deals with the challenges associated with modelling and adopting the appropriate policy for its economic system, the underlying structural and institutional imbalances within the economy have continued to impede the effects of government expenditure on economic growth, thereby misdirecting the focus of the government. This study empirically revisits the validity of Wagner’s law in the South African economy, as indicated by previous literature. The cointegration, Granger causality, impulse response function and threshold analysis were used as the estimation techniques, employing quarterly time series data for the period 1970Q1 to 2016Q4. While the cointegration results show the existence of long-run equilibrium relationship, Granger causality findings indicate a bi-directional causality between the two variables, supported by variance decomposition and impulse response analysis. The threshold regression lines conform to similar findings. This implies that in reality, Wagner’s law does not apply to the South African economy, given other social factors existing in the economy. This study therefore suggests that in order to determine the real direction of causality between the two variables, there needs to be a balance in the allocation of government expenditure, especially for investment purposes, as well as to curtail the huge portion that goes towards consumption.