EXPLAINING THE GROWTH OF GOVERNMENT SPENDING IN SOUTH AFRICA

What determines government spending in South Africa? The paper estimates the determinants of real per capita government spending in the Republic of South Africa using annual data for the period 1960‐2007, a tumultuous period during which South Africa experienced a variety of internally imposed changes (e.g. the abolition of apartheid, changes in political institutions) and externally generated shocks (e.g. war, oil shocks). Using multivariate cointegration techniques, we find that per capita government spending, per capita income, the tax share and the wage rate are cointegrated, a result that supports the notion that government spending is associated not only with per capita income and the true cost of government service provision as given by the wage rate but also with the fiscal illusion caused by budget deficits. We also find evidence that per capita government spending was positively affected by external shocks. These external shocks seem to play a significant role in explaining the dynamics of government spending growth.