Investigating the relationship between total government debt and economic growth in South Africa from 1994 to 2022

Abstract

The relationship between government debt and economic growth remains a key concern for many developing economies, including South Africa, particularly given rising public debt levels, increasing debt-servicing costs, and concerns regarding fiscal sustainability and long-term economic performance. This research was undertaken to investigate the relationship between total government debt and economic growth in South Africa from 1994 to 2022. Specifically, the study aimed to determine both the short-run and long-run relationship of total government debt on economic growth and to assess the causal relationship between the two variables. Annual time series data were obtained from the World Bank, National Treasury, and South African Reserve Bank, and included measures of economic growth (GDP growth rate), total government debt as a percentage of GDP, foreign direct investment, and inflation. To analyze the data, the study employed the Autoregressive Distributed Lag (ARDL) model, supported by the Bounds Test for cointegration and the Granger Causality Test. The empirical findings revealed a long-run co-integrating relationship between total government debt and economic growth. The long-run ARDL estimates demonstrate that government debt had a negative significant influence on economic growth, with the coefficient of total government debt estimated at -0.12, implying that a 1% rise in debt reduces economic growth by approximately 0.12%. In the short run, the first-difference of government debt, D(GTD), carries a significant negative coefficient of –0.669, while the second lag, D(GTD(-2)), is positive and significant at 0.3877. The Granger Causality Test found no evidence of a causal relationship between debt and growth. Overall, the findings suggest that while borrowing may provide short-term economic relief, persistent increases in total government debt negatively affect South Africa’s long-term economic performance. This highlights the importance of sustainable debt management and effective fiscal policy implementation in promoting stable and equitable economic growth.