The relationship between household consumption expenditure, disposable income and indebtedness in South Africa: An application of the vector error correction approach

Abstract

In a demand-led economy like South Africa, household consumption expenditure is a major source of economic development. The availability of consumer credit has allowed consumption spending to play a more active role. This, however, is followed by a disconnect between household spending and disposable income. One potential cause of the observed disconnect, according to the relative income hypothesis, is households' proclivity to imitate contemporary consumption expectations set by others. The difficulties that have resulted from the disconnection influence the factors that affect household consumption expenditure. The aim of this study was to use time series data to empirically analyse the South African household consumption function. For this analysis, the variables chosen were household spending expenditures, disposable income, and debt service burden for the years 1969 to 2019. The thesis was carried out using the Vector Error-Correction technique. The Augmented Dick-Fuller (ADF) and Philips-Perron (PP) tests were used to determine stationarity. Consumption expenditure and disposable income were found to be nonstationary at levels, they became stationary after first differencing. To assess the long-run relationship and assess the roles played by the three variables in achieving equilibrium after a shock, the Johansen Cointegration approach was used. Both disposable income and debt burden have a positive relationship with consumption spending. Furthermore, according to the findings, consumption spending does all the adjusting after a shock and does so slowly. The positive, though weak, relationship between consumption expenditure and debt burden is a noteworthy outcome. In South Africa, disposable income was found to have a positive impact on household consumption spending. As a result, the study suggests that the South African government consider implementing a basic income grant to help relieve the effects of high unemployment and poverty. Given that most people invest a substantial portion of their discretionary income on consumption, the government's revenue in the form of taxation would help to alleviate the fiscal burden