Cogent Economics & Finance

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Impact of government expenditure on economic growth

in different states in South Africa

Eugene Msizi Buthelezi

To cite this article: Eugene Msizi Buthelezi (2023) Impact of government expenditure on
economic growth in different states in South Africa, Cogent Economics & Finance, 11:1,
2209959, DOI: 10.1080/23322039.2023.2209959

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Buthelezi, Cogent Economics & Finance (2023), 11: 2209959
https://doi.org/10.1080/23322039.2023.2209959

DEVELOPMENT ECONOMICS | RESEARCH ARTICLE

Impact of government expenditure on economic
growth in different states in South Africa
Eugene Msizi Buthelezi1*

Received: 24 December 2022

Abstract: This paper investigates the impact of long-run government expenditure and
Accepted: 28 April 2023 economic growth in different states in South Africa. Economic growth has been below
*Corresponding author: Eugene Msizi the policy target of 5% stipulated in the National Development Plan Vision 2030, while
Buthelezi, Department of Economics, government expenditure growth has been volatile but increasing at a decreasing rate.
University of Free State Bloemfontein,
South Africa The paper uses the Vector-error correction (VEC) and Markov-switching dynamic
E-mail: msizi1106@gmail.com
regression with the data from 1994 to 2021. The significance of the paper is that it
Reviewing editor: assesses the short and long-run impacts of government expenditure on different states
Goodness Aye, Agricultural
Economics, University of Agriculture, of economic growth in South Africa. It is found that more government expenditure in
Makurdi Benue State, Nigeria
South Africa hasn’t resulted in the nation’s economy growing, which is at odds with the
Additional information is available at Keynesian viewpoint. In both lower economic states, government expenditure reduces
the end of the article
economic growth by 0.009% and 0.30%. The economy is expected to stay for 1 year in
state 1, while it is expected to stay for 13 years in state 2. Government expenditure
shocks were found to be detrimental to economic growth. It is recommended that
fiscal authorities increase government expenditure in the short run rather than in the
long run and monitor government expenditure.

Subjects: Macroeconomics; Development Economics

Keywords: government expenditure; economic growth; vector-error correction (VEC) and

Markov-switching dynamic regression

Subject: E62; H5; H21; O4

ABOUT THE AUTHOR

Eugene Msizi Buthelezi holds a BCom degree in economics and finance, master’s in economics from the
University of KwaZulu-Natal. He is currently in advanced stage to completing a PhD titled impact of
fiscal consolidation on government debt and economic growth in South Africa, this research is done at
the University of KwaZulu-Natal. Currently, the author is an nGAP Lecturer at the University of Free
State teaching economics for public managers at undergrad level. The author’s research interest is on
the macroeconomics on the aspect of macroeconomic modelling; fiscal policy, consumption; saving;
investment; unemployment. Further research interest includes monetary policy in the aspect of mone­
tary theory and policy; monetary systems; inflation; interest rates; central banks and their policies.

Eugene Msizi Buthelezi

© 2023 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.
This is an Open Access article distributed under the terms of the Creative Commons Attribution
License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribu­
tion, and reproduction in any medium, provided the original work is properly cited. The terms on
which this article has been published allow the posting of the Accepted Manuscript in
a repository by the author(s) or with their consent.

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1. Introduction
The investigation of the relationship between government expenditure and economic growth has
engrossed extensive consideration over the years as scholars debate. However, there is a lack of
consensus among scholars. Gurdal et al. (2021), Shkodra et al. (2022), and Kirikkaleli and Ozbeser
(2022), among others, have found that government expenditure has a positive impact on eco­
nomic growth. Phiri (2019), Onifade et al. (2020), and Hlongwane et al. (2021), among others, have
found that government expenditure harms economic growth. At a theoretical level, Keynesians
advocate for the positive impact of government spending on economic growth. The Classical view
postulates that government spending harms economic growth. Wagner argued that the increase
in economic activities is the causal effect running from government expenditure to economic
growth. The Ricardian Equivalence model argues that in the presence of a forward-looking
agent, government expenditure will not affect economic growth (Badaik & Panda, 2022).

Figure 1 reflects the data of G, which is the government expenditure growth rate, and DGP P,
which is the gross domestic product growth rate from 1990 to 2021. Over the period, the DGP P
recorded an average of 2.06%. This rate is not insufficient to fight other macroeconomic ills, such
as unemployment, poverty, and inequalities. SA fiscal authorities have adopted a different eco­
nomic policy to estimate economic growth. However, DGP Precorded a lower rate after 3 years of
adoption of every policy, while Gremains volatile. The Ghas reflected a slowing since 2013, while
DGP P has been operating below the 5% stipulated in the National Development Plan (NDP). As
such another question of the paper is what is the short and long-run impact of government
expenditure on economic growth? This question has been explored in SA by Molefe and Choga
(2017), Masipa (2018), and Hlongwane et al. (2021). The departure of this paper is that it furthers
the question, what is the impact of government expenditure in a different state of economic
growth? This is different to the short-run and long-run estimation as the paper further looks to
ascertain the impact government expenditure in different states of economic growth. The term
“states” in the paper defines lower and higher level of economic growth. On the other hand, given
that it is observed that Ghas reflected high volatility. The G has moved 6 times below the mean and
moved 4 times above the mean by 2.11%. The DGP P has moved 7 times below the mean and
moved 4 times above the mean by 2.06%. Therefore, questions are what is the probability of

Figure 1. Economic growth rate

and government expenditure
growth rate.

Sourced: (SARB 2020).

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economic growth moving from state to state? How long will economic growth be in a state? SA
DGP P is fragile to macroeconomic shocks reflected in Figure 1 graph a, with four sharps decided
that occurred in four episodes. It is in this regard that there is a question on what is the impact of
the shock on economic growth? Given the questions of this paper, the hypotheses are as follows:

Hypothesis 1

Null : There is no short and long-run impact of government expenditure on economic growth

Alt : There is short and long-run impact of government expenditure on economic growth.

Hypothesis 2

Null :There is no probability of transition to different regimes of economic growth rate.

Alt : There is the probability of transition to different regimes of economic growth rate.

Hypothesis 3

Null : Time spent by economic growth rate in a state cannot be assented.

Alt : Time spent by economic growth rate in a state can be assented.

Hypothesis 4

Null : Government expenditure shock has no impact on economic growth.

Alt : Government expenditure shock has an impact on economic growth.

The paper is significant because it is important to assess the short and long-run impact of
government expenditure in different states of economic growth in SA. This assists fiscal authorities
in knowing how to stimulate and control economic activities during different periods. The vector-
error correction (VEC) and Markov-switching dynamic regression (MSDR) models are used on time
series data from 1994 to 2021. It was found that there is a 0.62% and 0.07% reduction in
economic growth for a 1% increase in government expenditure both in the short and long-run,
respectively. In both lower economic states, government expenditure reduces economic growth by
0.009% and 0.30%. The rest of the paper has the following. First, in section 2, there is a literature
review on empirical studies. Thirdly, in section 3, there is a discussion of the methodology. Fourthly,
there is a discussion of the empirical results. Finally, section 5 is the conclusion and
recommendation.

2. Literature review

2.1. Theoretical review

The Harrod–Domar model is an economic growth model, which stresses that economic growth is
achieved or depends on the level of savings and capital output ratio within the economy (Cypher &
Dietz, 2008). Harrod–Domar model is given by ΔY ¼ I SδK. Where S is savingsI is investment δ is
depreciation K is capital and ΔY denotes the change in economic growth or income. The Solow
growth model provides the dynamic view of how savings, investment and population affect
economic growth reflected by Yt ¼ FðKt ; Lt � EÞ ¼ AðKt Þα ðLt Þ1 α where Y economic growth L is
labor K denotes capital, A indicates technological progress and E stands for efficiency of labour
which indicates public knowledge about production methods; which is triggered by the improve­
ment in technology denoted byA. The Solow growth model is a dynamic model, and this is denoted

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by subscript t in each variable of the model. The exponential subscripts of 1 α is the share of
output paid to labour and α is the share of output paid to capital (N. G. Mankiw, 2014, 2019). The
endogenous growth theory bridges the gap of the Solow growth model, which assumes that
technology is external in explaining economic growth (Rajiv R. Thakur, 2010). Endogenous growth
model is expressed by Y ¼ AK where A is a positive constant that reflects the level of technology. It
also indicates a constant measure of the volume of output produced for each unit of capital. The
subscript K is capital stock, however, unlike in the Solow model where capital K indicated only
equipment and fixed or physical capital (N. G. Mankiw, 2014, 2019).

2.2. Empirical literature review

Loizides and Vamvoukas (2005) examining how government spending affects economic develop­
ment in Greece, the UK, and Ireland revealed that all three nations’ public spending increases
national revenue over the long or medium term. Mo (2007) investigates how government spending
affects actual GDP growth. Government spending was found to have detrimental marginal impacts
on both GDP growth and productivity. In specifically, a 0.216% decrease in the equilibrium GDP
growth rate is caused by a 1% rise in the percentage of government consumption in the GDP.
Gisore et al. (2014) examine experimentally the relationship between government spending and
economic development in East Africa between 1980 and 2010. The results demonstrated that
spending on military and health had a statistically significant beneficial impact on growth.
According to this analysis, East Africa should adopt a strategy of higher health and defense
spending to encourage economic growth. Menla Ali and Dimitraki (2014), Markov-switching
dynamic regression reflected that increasing government spending is detrimental to economic
growth during slower growth–higher growth volatility periods. Chipaumire et al. (2014) invested
the impact of government expenditure and economics in South Africa from 1990 to 2010. It was
found that government expenditure resulted to a fall in economic growth. A 1% increase in the
government expenditures led to a 6.54% decrease in the GDP. Odhiambo (2015) examined the
dynamic causal relationship between government expenditure and economic growth in SA. Using
the autoregressive distributed lag model (ARDL), it was found that government expenditure causes
economic growth in the short run only and that economic growth causes government expenditure
in the short as well as in the long-run, with 89% of the disequilibrium corrected each year. The
Generalized Methods of Moments (GMM) was used by Kimaro, Keong et al. (2017) in the fort to look
at the effects of government efficiency and spending on the economic growth of low-income sub-
Saharan African nations from 2002 to 2015. It has been discovered that raising government
spending helps sub-Saharan African nations with low incomes grow economically faster. Sub-
Saharan African countries with low incomes should think carefully before utilizing their spending
to boost the economy.

Molefe and Choga (2017) investigated government expenditure and economic growth in SA. It
was found that government expenditure is detrimental to economic growth. The MSDR of Eid and
Awad (2017) was used to investigate the impact of government consumption expenditure on
economic growth. It was found that government consumption expenditure in state 1 increased
economic growth by 0.04%, while state 2 (the low recessionary state) reduces economic growth by
0.25%. The VEC model was undertaken by Masipa (2018) to investigate government expenditure
economic growth in SA. It was found that a 1% increase in government spending will lead to
a 0.2% decrease in economic growth.

Phiri (2019) used the logistic smooth transition regression (LSTR) model and found an inverted
U-shaped relationship between military spending and economic growth. These results suggest that
government military spending increases economic growth. However, government military spend­
ing eventually results in a decrease in economic growth. Nyasha and Odhiambo (2019) research
has shown that there are grey areas in the relationship between government spending and
economic growth. It can be either good or negative, some studies have even found no effect
and are inconclusive. Dinh Thanh and Canh (2019) investigated the dynamics between govern­
ment spending and economic growth using the MSDR mode. It was found that there is an 87%

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probability of staying in state 1, while there is an 85% probability of staying in state 2. The
government spending changes in state 1 were 0.303% and 0.18% in state two increased in
economic growth. L (2020) found an inverted-U-shaped relationship between output growth and
government spending. The MSDR model showed that 58% chance of moving from state 1 and
returning to state 1. There is a 32% chance of moving from state 2 and returning to state 2. The
expected periods of states 1 and 2 were 12 and 16 years, respectively.

Mose (2020), using the EVC model, found that a 1% increase in government spending had
a 0.02% negative impact on regional growth. Short-term unidirectional causality between capital,
recurring expenses, and growth was found. The absence of a long-run causal relationship con­
necting growth to expenditure components suggests that macroeconomic measures for economic
growth can be undertaken without negatively influencing the level of government spending. Yang
(2020) investigated the effect of government expenditure on health on economic growth in 21
developing countries. It was found that health expenditure impairs economic growth by 0.07% in
developing countries. However, when the level of human capital is high, there is a positive impact
of health expenditure on economic growth. Anisaurrohmah, Rizali et al. (2020) found that the
government expenditure variable partially does not have a significant effect on economic growth.
However, it was noted that an increase in investment and labour experience will affect the
increase in economic growth. Anwar, Ahuja and Pandit (2020) employed panel data from 33
provinces and discovered that economic growth increases by 0.15% whenever there is a 1% rise
in government spending. Additionally, the spatial Durbin model (SDM) demonstrates that invest­
ment and education have a favourable impact on the economic development of nearby regions.

Nartea and Hernandez (2020) analyze a panel of data from 12 provinces to determine the
breakdown of government spending on economic growth. It was discovered that government
expenditure and economic expansion are positively correlated. The investigation of the impact of
productive and nonproductive government expenditure on economic growth was undertaken by
Chu et al. (2020) based on OLS fixed effects and the Generalized Methods of Moments (GMM)
system approach. It was evident that a 1% increase in productivity, as well as nonproductivity
expenditure, increased and decreased economic growth by 0.05% as well as 0.06%, respectively. It
was noted that developing economies are shifting government expenditure away from nonpro­
ductive government expenditure and toward productive forms of expenditure which is associated
with higher levels of growth. Ahuja and Pandit (2020) discovered that there is one-way causality
between economic growth and public spending, where the link runs between public spending and
GDP growth. Moreover, a 1% increase in government expenditure increases economic growth by
0.002%.

Hlongwane et al. (2021) investigated the impact of government expenditure on economic

growth in SA. Using the ARDL model, it was found that a 1% increase in government expenditure
in the short-run will significantly increase economic growth by 0.15% in SA. On the other hand, the
long-run result reflected that a 1% increase in government expenditure will reduce economic
growth by 0.117% ceteris paribus. Mishra and Mohanty (2021) revealed that government expen­
diture has a favourable and statistically significant influence on economic growth. The Dumitrescu-
Hurlin paired causality test demonstrates that there is a causal relationship between government
spending and economic growth in both directions. It was emphasized that an expansionary fiscal
policy, which involves investing in the productive sector and creating infrastructure, as well as
lower interest rates, will assist the country in achieving faster economic growth. Similar to Mishra
and Mohanty (2021), Gurdal et al. (2021) found long-run bidirectional causality between govern­
ment expenditure and economic growth in the G7 countries by utilising time series data spanning
the period from 1980 to 2016. It was recommended that public spending should be encouraged in
the G7 nations to keep its positive contribution to the growth of these economies.

Shkodra et al. (2022) found support for the positive impact of government expenditure on
economic growth. Using OLS, it was found that a 1% increase in government expenditure increases

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economic growth by 0.03%. Kirikkaleli and Ozbeser (2022) findings showed that in the long-run,
economic growth leads to government spending, while in the short term, especially during reces­
sions, government spending merely serves to boost economic growth.

3. Materials and methods

This paper uses quantitative analysis of economic variables used are GDP P expenditure on the
gross domestic product, AOLR which is the average output labour ratio, AOKL which is the average
capital-labour ratio, HC household consumption, G government expenditure, and GFCFgross fixed
capital formation. The data are sourced from the SA Reserve Bank (SARB). The models adopted in
this paper are the vector-error correction (VEC) and the Markov-switching dynamic regression
model (MSDRM) from 1990 to 2021.

The VEC is used because of its advantages, in cointegrating relationships, and long-run para­
meters are possible. This is not easily achieved in a VAR and OLS. Other scholars that have used the
model include Hlongwane et al. (2021), and Kirikkaleli and Ozbeser (2022), among others. The
MSDRM is used because it provides attractive transition features over a set of finite states (Hansen,
1996, 2000). This is important because this paper seeks to investigate the long-run impact of
government expenditure and economic growth in different states in SA. The MSDRM can reflect the
impact in different states given the transition. Other scholars that have used the model include
L (2020) and Anwar et al. (2020), among others.

3.1. Theoretical framework

The Solow growth model was first introduced in 1956 and provides a dynamic view of how savings,
investment and population affect economic growth (N. Mankiw, 2010; 2012). The Solow growth
model is specified in Equation (1).

Yt ¼ FðKt ; Lt � EÞ ¼ AðKt Þα ðLt Þ1 α

(1)

Where Y ¼ GDP P economic growth L ¼ AOLR is labor K ¼ AOKR denotes capital A indicates tech­
nological progress and E stands for efficiency of labour which indicates public knowledge about
production methods, which is triggered by the improvement in technology denoted byA. The Solow
growth model is a dynamic model, and this is denoted by subscriptt in each variable of the model.
The exponential subscripts of 1 α in Equation (1) are the share of output paid to labour and α is
the share of output paid to capital. The assumptions of the Solow growth model.1 In the Solow
growth model, it is rationalised that the economy will reach the steady state, which is a value of
per capital-capital k� such that, if the economy has k0 ¼ k� then kt ¼ k� "t>1 (Kung & Schmid,
2015). At the steady state, the Solow model advocates that savings is equal to the amount needed
to provide equipment (investment) that is needed for any additional workersn and compensate for
depreciation of equipment d given by sf ðkÞ ¼ ðn þ dÞk. Since n and d are constant and f ðkÞ satisfies
the Inada condition2 the consumption is proportional to output c ¼ ð1 sÞf ðkÞ. The possible
choices for s one will produce the highest possible steady state value for c and this is called the
golden rule3 savings rate (N. Mankiw, 2010, 2012). However, for this paper, the above Cobb-
Douglas method will be extended with other economic variables, such as HC household consump­
tion, G government expenditure, and GFCF gross fixed capital formation reflected in equation (2).

GDP Pt ¼ β1 þ β2 AOLRt þ β3 AOKRt þ β4 HCt þ β5 Gt þ β6 GFCFt þ et (2)

Where β is beta and et is the n � 1 vector of independent and identically distributed error terms.

3.2. Vector- error correction

The VEC model is built in from the unrestricted vector autoregressive (VAR), as reflected in
equation (3).

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p
yt ¼ β0 þ ∑ βj Xt 1 þ et (3)
j¼1

Where yt is an n � 1 vector of the nonstationary Ið1Þ variable, β1 is an n � 1 vector of constants, p is

the number of lags, βj is an n � n matrix of estimable parameters, and et is an n � 1 vector of
independent and identically distributed error terms. The VEC model can handle cointegrated and
different economic variables. Therefore, the VAR model is rewritten as the VEC model, as reflected
in equation (4).

p p
Δyt ¼ β0 þ ∑ Γj ΔXt 1 þ ∑ �j Xt 1 þ γj ECT þ et (4)
j¼1 j¼1

Where Δ is the difference operator, and the VECM specification contains information on both the
short- and long-run adjustment to changes in Xt via the estimated parameters Γ and ,
respectively.

3.3. Markov-switching dynamic regression

The MSDR is used for series that are believed to transition over a finite set of unobserved states,
allowing the process to evolve differently in each state. The transitions occur according to a Markov
process, from one state to another, and the duration between changes in the state is random
(Hansen, 1996, 2000). The two states can be present in equations (5) and (6).

State 1 : yt ¼ μ1 þ 2t (5)

State2 : yt ¼ μ2 þ 2t (6)

where μ1 and μ2 are the intercept terms in state 1 and state 2, respectively, and 2t is a white noise
error with variance σ2 . The transition probabilities are shown in a matrix (7).

� �
p11 p12
P¼ (7)
p21 p22

The theoretical framework outlined in equations (1 to 2) is then extended in the Markov-switching

dynamic regression in equation (8).

�
β11 þ β21 AOLRt þ β31 AOKRt þ β41 HCt þ β51 Gt þ β61 GFCFt þ e1t
GDP Pt ¼ (8)
β12 þ β22 AOLRt þ β32 AOKRt þ β42 HCt þ β52 Gt þ β62 GFCFt þ e2t

4. Results and discussion

Table 1 shows descriptive statistics of economic variables from 1990 to 2022. The GDP Pis found to
have a mean of 2.06%. The level of AOLR is found to have an average of 0.59% between 1979 and
2022. The AOKR is found to have a mean of 0.16%. The HC is found to have a rate of 9.90% over the
period reflecting the mean. The Gis found to be 2.11%, and the GFCFis found to be 8.92% on
average.

In as far as the skewness all the economic variables considered are found to have a positive
skewness. The kurtosis (being an atheoretical measure of normal distribution) value of 0.9992
suggests that the distribution of AOLRwas leptokurtic. That is, it was highly peaked with very thin
tail among economic variables considered. Table 2 shows the correlation between economic
variables. All the economic variables of interest considered in the paper are found to have positive

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correction with GDP except AOKR. In the variables of interest, the rest G has a correlation value of
2.11 with GDP.

Table 3 shows the Dickey–Fuller and Phillips–Perron unit test for the economic variables of
interest in the paper. Consideration of non-stationary in the data used is important because if
no considered the result can be spurious regression leading to misleading coefficient results
(Costantini and Martini, 2010). A stationary time series has statistical properties or moments
mean and variance that do not vary in time. Most of the economic variables are stationary at
level these economic variables on GDP P, and AOLR. On the other hand, the economic variables of
D:AKR, D:WUI, and D:CAPBare stationary at the first difference or first-order condition.

MacKinnon approximate p value for Z(t) = 0.0280.

The lag-order selection criteria of (AIC, HQIC, and SBIC) are presented in Table 4. The criteria AIC,
HQIC, and SBIC recommend the use of the optimal 3 lag.

The results of the Johansen cointegration tests, in Table 5, show that the null hypothesis for the
zero cointegrating equation is rejected at a 0.05 significance level. These results provide evidence
that there is a long-run relationship. Therefore, the VEC is relevant for estimation.

Table 6 shows the vector-error correction model results in the short-run and the long-run. In the
short-run, it is found that a 1% increase in LD:GDP P in the past year results in a reduction in GDP P
in the current period by 0.47%. On the other hand, in the short-run, it is found that a 1% increase in
L2D:G in the past 2 years results in a reduction in GDP P in the current period by 0.62%. The
negative suggests that it is ineffective to stimulate GDP P in the short-run. This can be attributed to
ineffective spending, not spending in productive sectors and the corporation that may not be
found in the short-run. In the long-run, a 1% increase in G results in an increase in GDP P in the
current period by 0.07%. This result is similar to that of Hlongwane, Mmutle et al. (2021), and
Shkodra, Krasniqi et al. (2022).

Table 1. Descriptive statistics

Variable Obs Mean Std. Dev. Min Max Skewness Kurtosis
GDP P 32 2.0656 2.499498 −6.3 5.6 0.0052 0.0198
AOLR 32 .59509 2.139125 −4.33 4.22 0.2930 0.9992
AOKR 32 .16988 1.969614 −2.33 5.21 0.1897 0.6086
HC 32 9.9049 4.268413 −2.77 21.43 0.6867 0.0300
G 32 2.1106 2.620653 −6.00 7.67 0.1347 0.0471
GFCF 31 8.9263 8.605567 −11.64 26.46 0.9632 0.7486

Table 2. Correlation between variables

Economic
variable GDP AOLR AOKR HC G GFCF
GDP P 1
AOLR 0.8559 1
AOKR −0.2264 0.1823 1
HC 0.3543 −0.0216 −0.5657 1
G 0.3051 0.3616 0.2061 −0.0133 1
GFCF 0.7685 0.6400 −0.1423 0.3904 0.3762 1

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 Table 3. Dickey–Fuller test for unit root
Dickey–Fuller test for unit root Phillips–Perron (PP)
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1% Critical 5% Critical 10% Critical 1% Critical 5% Critical 10% Critical

Variable Test Statistics Value Value Value Test Statistics Value Value Value
Buthelezi, Cogent Economics & Finance (2023), 11: 2209959

GDPR Z(t) −3.886 −3.709 −2.983 −2.623 −3.886 −3.709 −2.983 −2.623
D.AOLR Z(t) −5.487 −3.716 −2.986 −2.624 −5.487 −3.716 −2.986 −2.624
D.AOKR Z(t) −8.280 −3.716 −2.986 −2.624 −8.280 −3.716 −2.986 −2.624
HC Z(t) −3.997 −3.709 −2.983 −2.623 −3.997 −3.709 −2.983 −2.623
D.G Z(t) −4.003 −3.709 −2.983 −2.623 −4.003 −3.709 −2.983 −2.623
D.GFC Z(t) −5.610 −3.723 −2.989 −2.625 −5.610 −3.723 −2.989 −2.625
Note: Number of obs = 21.

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Table 4. Lag-order selection criteria

Lag AIC HQIC SBIC
0 25.8959 25.9815 26.1839
1 22.8071 23.4064 24.8228
2 21.2436 22.3568 24.9872
3 17.3053* 18.9322* 22.7766*

Table 7 reflects the eigenvalue stability condition. The null of no stability in the model is rejected
given the results.

Table 8 reflects the Lagrange-multiplier test given that Prob > chi2 suggests that the null that
there is autocorrelation at lag order is rejected, and there is a conclusion that there is no
autocorrelation at lag order 1 at a 5% p-value.

Table 9 reflects the result of the Jarque–Bera test, which tests for the normality distribution. The
probability value of the Jarque–Bera statistic is greater than 5%; therefore, we fail to reject the null
hypothesis and conclude that the residuals are normally distributed.

Figure 2 shows the effect of government expenditure shocks on economic variables of interest:
economic growth. Figure 2, graph d, reflects that the government expenditure shock on economic
growth is detrimental. This is because the shock resulted in a 0.5% fall in economic growth.
Thereafter, economic growth increases and returns to equilibrium in year 3. However, after that,
economic growth is below equilibrium.

Table 10 reflects the MSDR model from 1990 to 2021. In the first state, estimation 1 of G is found
to have a mean of −1.900%. In estimation 4, it is found that a 1% increase in G results in a 0.009%
fall in GDP P. This result is similar to that of Mo (2007) and Chipaumire, Ngirande et al. (2014). This
result suggests that it will be detrimental for fiscal authorities to use the expansionary fiscal policy
at a time of negative economic growth. As such, it may be recommended that SA move away from
the use of international debt to finance government expenditure when economic growth is
recording a negative rate. In the second state model, estimation 1 of G is found to have a mean
of 2.804%. This state of the economy still has a mean economic growth that is below 5%, which is
stipulated in the NDP. As such, this reflects that the SA economy is not yet in a state to resolve
other macroeconomic challenges, such as unemployment and poverty. In the second, it is found
that a 1% increase in G results in a 0.303% fall in GDP P.

Figure 3 reflects state 1 to 2 filter transition probabilities and the data of GDP P. Figure 3 graph
a reflects that GDP P move to state one in two episodes, first in 1994 and second in 2019. This
suggests that SA GDP P is not prone to stay in a negative state. As such, the result reflects that the
economy may recover faster in the occurrence of a recession. Figure 3 graph b reflects the filter
transition probabilities for state 2, which is characterized by a negative mean of 2.804%. It is found
that the economy moved to this state two times. The economy was in state 2 from 1995 to 2018.

Table 5. Johansen tests for cointegration

Maximum Trace Critical value
rank Params LL Eigenvalue statistic 5%
0 42 −304.73924 . 149.0001 94.15
1 53 −275.80617 0.86404 91.1340 68.52
2 62 −256.01131 0.74466 51.5443 47.21
3 69 −240.33515 0.66078 20.1920* 29.68

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 Table 6. Vector-error correction model
Economic variable Short-run Economic variable Long-run
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L: ce1 −0.407*
Buthelezi, Cogent Economics & Finance (2023), 11: 2209959

(−0.27)

LD:GDP P −2.065 GDP P

1
(−1.45)

L2D:GDP P −4.280* AOLR

−1.062552***
(−2.49)
(0.000)
LD:AOLR 1.349 AOKR
0.2075268***
(0.98)
(0.000)
L2D:AOLR 4.399** HC
−0.0332629*
(2.62)
(0.038)
LD:AOKR 2.309* G
0.0759424***
(2.00)
(0.000)
L2D:AOKR 2.458 GFCF
−0.0511754***
(1.54)
(0.000)
LD:HC −0.478*

(Continued)

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 Table6. (Continued)
Economic variable Short-run Economic variable Long-run
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(−2.06)
Buthelezi, Cogent Economics & Finance (2023), 11: 2209959

L2D:HC −0.171

(−0.98)

LD:G −0.477***

(−3.84)

L2D:G −0.620***

(−3.68)

LD:GFCF 0.444*

(2.29)

L2D:GFCF 0.179

(1.58)
.
cons 0.0350 cons
−.851466
Note: N = 29
*p < 0.05, ** p < 0.01, *** p < 0.001

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Table 7. Eigenvalue stability condition

Eigenvalue Modulus

−.2101073 +1.175174i 1.19381

−.2101073 − 1.175174i 1.19381
1 1
−.2191833 +.6857053i .719884
−.2191833 - .6857053i .719884

Table 8. Lagrange multiplier test

lag chi2 df Prob > chi2
1 46.9738 36 0.10419
2 38.6490 36 0.35084

Table 9. Jarque–Bera test

Equation chi2 df Prob > chi2
D:GDP 6.505 2 0.03868
D:AOLR 1.143 2 0.56477
D:AOKR 3.578 2 0.16716
D:HC 29.785 2 0.00000
D:G 11.020 2 0.00405
D:GFCF 1.575 2 0.45509
ALL 53.604 12 0.65657

Figure 2. Government expendi­

ture shock on economic
variables.

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Table 10. Markov-switching dynamic regression

Estimation

Economic 1 2 3 4
Variables GDP P GDP P GDP P GDP P
AOLR 0.905*** 0.888*** 0.915***
(30.33) (28.63) (34.86)
AOKR −0.206*** −0.235*** −0.206***
(−7.36) (−7.62) (−7.94)
State1
HC 0.0405** 0.0309*
(3.02) (2.54)
GFCF 0.0197* 0.0281*** 0.0173*
(2.56) (3.39) (2.32)
G −0.00486 −0.00910*
(−0.24) (−0.54)
cons −1.900* 1.111*** 1.473*** 1.272***
(−1.50) (8.02) (17.24) (9.54)
State2
HC 0.234** 0.297***
(8.63) (8.63)
GFCF 0.106 0.283*** 0.134***
(1.91) (4.99) (6.18)
G −0.405 −0.303***
(−1.08) (−3.31)
cons 2.804*** −1.962*** −0.118 −1.207
(6.80) (−4.45) (−0.13) (.)
N 32 31 31 31
Note: t statistics in parentheses
*p < 0.05, ** p < 0.01, *** p < 0.001.

The economy moved back to this state from 2012 to 2019. Figure 3 graph c reflects states 1 to 2
for GDP P moving from state to state.

Table 11 shows the transition probabilities of the two states. There is a 92% chance of the
economy moving from state one and returning to state one. There is a 100% chance for the
economy to move from state two and return to state two.

Table 12 reflects the expected duration to be spent in each state. It is found that the economy
will be in state 1 for 1 year. It is expected that the economy will spend 13 years in state 2. These
results suggest that a long time will be spent in positive economic growth.

5. Conclusion and policy implications

The objective of this paper was to investigate the short- and long-run impacts of government expenditure
on economic growth. Economic growth has been below the desired by SA policy. The question of the paper
was what is the impact of Molefe and Choga (2017), Masipa (2018), and Hlongwane, Mmutle et al. (2021)
government expenditure in a different state of economic growth? The vector-error correction (VEC) and
Markov-switching dynamic regression (MSDR) models were used. It was found that there is a 0.62% and
0.07% reduction in economic growth for a 1% increase in government expenditure both in the short and
long-run, respectively. This is confirmation of the relational of the Classical view which postulates that

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Figure 3. State 1 to 2 filter tran­

sition probabilities and GDP P.

Table 11. Transition probabilities

Transition Transition
probabilities Estimate probabilities Estimate
p11 0.9231075 p21 1.73e-20
p12 0.0768925 p22 1

Table 12. Expected duration

Expected duration Estimate
State1 1
State2 13.00517

government spending harms economic growth than the Keynesians advocate. The findings may provide
an overview of policy suggestions to improve the effects that government expenditure has on economic
growth. Given that government expenditure is found to be detrimental on economic growth, it advised
that the South African government restructure it expending to be irrected in productive sectors of the
economy in the effort to achieve macroeconomic goals for economic growth. It is recommended that the
government increase the effectiveness of its public programs and service delivery in order to reduce the
wastage of the limited economic resources. There is a 92% chance of the economy moving from state one
and returning to state one. It is recommended that fiscal authorities increase government expenditure in
the short-run rather than in the long-run. This is because, in the short-run, there is a small negative effect
in the long-run. Moreover, the government needs to ensure that there is monitoring and evaluation of
government expenditures. Government expenditure needs to be directed to projects that will stimulate
economic growth. In the fort to have more insight on the impact of government expenditure on economic
growth it is recommended that future studies look at the of fiscal decentralization. This will allow fiscal
authorizes to have an understating of what is the impact of government expenditure on economic growth
at a local level.

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ORCID ID: http://orcid.org/0000-0002-2233-7347 Gurdal, T., Aydin, M., & Inal, V. (2021). The relationship
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Department of Economics, University of Free State, between tax revenue, government expenditure, and
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