Government Expenditure and Economic Growth in Ghana

Abstract

The study investigated the relationship between government expenditure and economic growth in Ghana. It considered both aggregated and disaggregated government expenditure. Annual time series data from 1985 to 2012 was employed for the aggregated analysis while at the disaggregated level, annual time series data from 1985-2010 was employed due to data constraint. The study resorted to the maximum likelihood estimation (MLE) technique and cointegration among the variables was established within the framework of autoregressive distributed lag (ARDL). A piece-wise linear regression was used to examine the possibility of government expenditure threshold. The results of the ARDL indicated that aggregate government expenditure negatively affects growth in the long run but positive in the short run. According to the Granger causality test the study found that there is a unidirectional causality running from economic growth to government expenditure, which supports Wagner’s Law. The results based on the disaggregated analysis point to the fact that capital expenditures promote economic growth whiles recurrent expenditures retard growth in Ghana. The study also found the existence of government expenditure threshold. Based on these findings the following policy recommendations are suggested: the government must restructure its expenditures by cutting down its recurrent expenditures while increasing capital expenditures. However, increase in government expenditure must be done cautiously as excessive increase will deter economic growth in the long run.