The impact of economic crises and government debt on consumption expenditure in South Africa

Abstract

This study investigated the impact of economic crises and government debt on consumption expenditure in South Africa using quarterly time series data from 1993Q1 – 2020Q4 from the South African Reserve Bank (SARB) and Quantec (Easy Data). The study used both a linear and non-linear autoregressive distributed lag model (ARDL and NARDL). The variables of the study included consumption expenditure, total foreign debt, national government debt, government expenditure, government expenditure for social protection, the fuel levy, value added tax, personal income tax, gross domestic product (GDP), and inflation. Economic crises cause governments to increase their debt accumulation, which they later repay partly through taxes, and this has an impact on consumption expenditure. The conceptual framework describes how an economic crisis can reduce consumption by substituting certain goods for others, which can lead to a decrease in consumption expenditure. However, when it comes to data analysis, economic crises increase consumption expenditure due to taxes being a burden on consumers. Using the ARDL model, the study finds that total foreign debt (proxy for economic crises), government expenditure, government expenditure for social protection, and the fuel levy all increase consumption expenditure. Thus, it would be prudent for the government to employ more tax strategies to ease the pressure on consumers. The NARDL shows that in the long run, national government debt is insignificant. However, in the short run the variable shows itself to be significant. The study’s Granger causality test shows a unidirectional causality from consumption expenditure to all variables apart from inflation. This study will contribute to scholarship by contributing to the contemporary literature on the impact of economic crises on consumption expenditure. It will also illuminate the relationship between taxes and consumption in South Africa. The results of the study can be used for research and policy decision-making by institutions such as, but not limited to, the Davis Tax Committee, the South African Revenue Services, the National Treasury, and the South African Reserve Bank.