Determinants of income inequality: a case of government socioeconomic spending in South Africa.

Abstract

Income inequality in South Africa has remained a significant challenge, despite numerous government interventions, especially since the democratic transition in 1994. Rather than diminishing, it has persisted over time. This study explores the key determinants of income inequality in South Africa, with a particular emphasis on the effects of government socioeconomic spending, notably through social grants. Furthermore, the study analyses the influence of gross savings, population growth rate, and economic growth on the dynamics of income inequality. Using a Vector Error Correction Model (VECM), the analysis draws on time-series data from 1975 to 2017 to evaluate the effects of government spending on social grants, gross savings, economic growth, and population growth rate on income inequality. The findings reveal that government spending on social grants and gross savings negatively impacts income inequality, while population growth has a positive impact. The findings imply that government spending on social grants and gross savings contributes to reducing income inequality, while the population growth rate exacerbates it. Furthermore, the results reveal a negative long-term relationship between economic growth and income inequality. The findings offer valuable guidance for policymakers in crafting targeted interventions to mitigate income inequality in South Africa. The study also enriches the existing literature by empirically assessing the impact of government socioeconomic spending and exploring how redistributive policies influence income inequality. The study recommends a comprehensive approach to address income inequality in South Africa, including increased social spending, social security reforms, and promoting a savings culture.