The relationship between government revenue and government expenditure in South Africa: a cointegration and causality approach.

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.