The Effects of Social Spending on Economic Activity in South African Provinces

Social policy is as important to economic development as economic policy. However, theoretical and empirical evidence of social spending’s impact on economic growth is ambiguous. Some papers argue that social spending impedes economic growth and development, while others maintain that social spending is instrumental in stimulating economic development. An important question to ask is whether or not social spending is a potential lever for economic growth and development in South Africa. Efficient social spending contributes to the formation of capital: human capital, through its investment in education and health, and physical capital, through its investment in infrastructure (for example related to education and health). Human and physical capital are both crucial for economic growth and development and are continuously emphasised in the government’s fiscal framework. The National Development Plan (NDP) also emphasises human capital, productive capacity and infrastructure as prerequisites for the creation of a more equitable and inclusive South Africa (NPC, 2012). In addition to the NDP, the New Growth Path (NGP) focuses on the government’s role in directing resources towards job drivers (i.e. drivers necessary for the creation of decent jobs for South Africans), such as infrastructure investment. The NGP also emphasises that a productive labour force can be achieved through human capital development, which is vital in addressing structural problems inherent in the South African labour market (for example, skill shortages).