The relationship between government revenue and government expenditure in South Africa: a cointegration and causality approach.
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Date
2021
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Abstract
The government plays an important role in stabilising the economy, by implementing adequate
economic policies such as fiscal policy, which consists of government revenue and government
expenditure. A budget deficit arises when government expenditure exceeds government
revenue. It is important to understand the direction of causality between government revenue
and government expenditure, as this will assist when suggesting the remedial approach that
should be followed by budgetary authorities in order to effectively deal with the budget deficit.
The main objective of this study was to determine the relationship between government
revenue and government expenditure in South Africa. The study employed annual time series
data from 1982 to 2019, taken from the South African Reserve Bank website and the Economic
Research Federal Reserve Bank of St. Louis. The Johansen cointegration test was used to test
for cointegration and the Granger causality test was used to test for causality. The empirical
results found that the variables are cointegrated. Therefore, a long-run relationship exists
between the variables. The results of the Granger causality test found that there is no causality
between government revenue and government expenditure. Therefore, policy makers or
budgetary authorities should make its revenue and expenditure decisions separately. The
dissertation also went an extra step by analysing the disaggregated expenditure and revenue
patterns. The reason that this was done is because the researcher wanted to examine the effects
that the different types of expenditure and revenue have on South Africa’s fiscal position.
Further policy recommendations were made based on the trends of the data that were observed
from the disaggregated expenditure and revenue patterns.
Description
Masters Degree. University of KwaZulu-Natal, Durban.