Actual vs Optimal Size of the Public Sector in South Africa

Abstract

The optimal size of government or the public sector in general has been the topic of many
studies and debates all over the world. There are some who state that the public sector should play a
much greater role in the economy, while others proclaim the private economy is a much better placed
to generate the desired economic outcomes. This article investigates this issue and applies it to South
Africa as there is no consensus on the optimal size of the South African government. The reporting
formats of the National Treasury and South African Reserve Bank (SARB) were used to define the
public sector, and estimate its actual size and contribution to the country’s economy. The research
period ranges from 1992 to 2017. In theory, the BARS or Armey curve suggests that there exists an
inverted U shape association between the size of government and optimal economic growth, and that
was tested. Various regression equations were assessed using the fully modified OLS (FMOLS)
estimation technique. The optimum level of the public sector size is estimated to be between 18 and
24% of the economy, which compares to the current level of between 30 and 50%, while optimal levels
were experience between 2005 and 2007. The results suggest that the size of the South African public
sector is significantly larger than optimal.