Dynamic interplay between government expenditure and private sector in South Africa’s economy: Crowding-in versus crowding-out effects

Abstract

This article seeks to empirically examine the dynamic relationship between government expenditure and private sector investment in South Africa. The research employed a Vector Autoregression (VAR) methodology to experimentally investigate the crowding impacts of government spending on private sector investment, utilising time series data from 1960 to 2021. The study evaluates single equation methods, including Dynamic Ordinary Least Squares, Fully Modified Ordinary Least Squares, and Canonical Cointegrating Regression, to analyse the long-term cointegrating relationship between government expenditure and private sector investment. The results offer robust empirical evidence of a beneficial relationship between government expenditure and private sector investment, suggesting that an increase in government spending stimulates private sector investment in South Africa's economy. The impulse response function (IRF) indicated that private sector investment reacts favourably to unexpected fluctuations in government expenditure and GDP growth. The study's findings indicate that governments should allocate substantial funds to productive sectors to stimulate economic activities, encourage private sector investment through robust public-sector collaboration, and ultimately promote job creation and economic growth.

Keywords: {'name': 'Government expenditure'}, {'name': 'Private investment'}, {'name': 'Crowding-in'}, {'name': 'Crowding-out'}

Authors & affiliations

Bongumusa Makhoba
University of Zululand

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