A Time Series and Panel Analysis of Government Spending and National Income

Abstract

This study examined the causal relationship between government spending and national income in panel of three African countries – Nigeria, Ghana and South Africa - during the period 1970 to 2012 using Johansen Fisher Panel Cointegration Test and then on a country-by-country basis using time series Johansen-Juselius cointegration techniques. The panel cointegration results indicate a long run relationship between government spending and national income in the whole panel. The Johansen-Juselius cointegration test suggests an existence of long run relationship between government spending and national income only for Ghana as predicted by Wagner, thus suggesting government spending is not an important factor in economic growth in the long run in Nigeria and South Africa. We found an evidence of bi-directional causality granger causality tests for the whole panel. Furthermore, the result from the causality test shows that there is a bi-directional causality that runs from national income to government expenditure and vice versa for Nigeria and South Africa. However, for Ghana, there was a uni-directional causality that runs from government expenditure to national income and there is no feed-back mechanism. We concluded that Government spending enhances National Income enormously and vice-versa in the short run for Nigeria and South Africa