Testing wagner’s law of government size for South Africa, 1950-2008

Abstract

This paper presents an empirical analysis of Wagner‟s law in the case of South Africa over the period 1950–2008. The paper uses modern time-series econometric techniques, bordering on co-integration analysis to test the law‟s proposition that in the course of economic development, government size in the GDP increases. The results of this study support the empirical validity of Wagner‟s law for South Africa. In effect, the validity of Wagner‟s law, which states that the growth of public expenditure is a function of increase in economic activity, is therefore verified for the South African economy. In addition, the long data sample ensures the reliability of the results in terms of economic significance and statistical inference. Absence of structural break and the stability of the time series data employed are verified by the results of the CUSUM conducted. Policy-wise, the results imply that development plans of South Africa must incorporate such fiscal policy measures that would guarantee commensurate growth in government revenue.

Keywords: Wagner‘s law; co-integration; causality; government size; growth, OLS.