The Nexus Between Taxation, Government Expenditure, and Economic Growth in South Africa. New evidence from combined co-integration test

The relationship between taxation, government expenditure, and economic growth is a widely debated issue in literature. This research aims to present new evidence from the nexus of taxation, government expenditure, and economic growth for the period 1991-2018 in South Africa, using recently developed combined co-integration test. Autoregressive Distributed Lag Model (ARDL) is utilized to examine coefficients between the variables in the short and long-run. The newly advanced Bayer-Hanck (2013) combined co-integration approach is employed to verify the ARDL bounds result. Furthermore, the Granger causality (GC) testing approach is applied to test the causality between the selected variables. The findings of the Bayer-Hanck cointegration test highlight the sturdiness of the ARDL approach. These outcomes suggest a long-term relationship and all the variables correlate together in the long run. The empirical findings from the ARDL model revealed a positive and significant linkage between government expenditure and economic growth in both the short and long run. Also, the study shows that tax revenue has a significant positive relationship with economic growth. Therefore, levels of taxation and government expenditure are favorable to the growth of the economy in South Africa. The research suggested that decision-makers in South Africa should pay more attention to taxation and government expenditure policies, such as channel much of its expenditure towards the manufacturing and agricultural sectors. This would reduce the prices of the local products, and make the country's export prices competitive.