Effect of government spending on economic growth in Ghana

Abstract

Government spending plays an essential role in determining the changes in the level of national income; providing the necessities for potential output and sustaining the wellbeing of the economy. Thus, government spending on goods and services contribute to the productive potential of an economy. This study employed exploratory causal study design to assess the impact of government spending on economic growth within the context of Ghanaian economy. The study use annual time series spanning from 1970 to 2018. Data was collected from World Development Indicators (WDI). The study tested for unit root and co-integration to ascertain the existence of long run relationship among the variables. Based on the result of the unit root test, ARDL model was adopted. The result indicated that there exist both long run and short run relationship among the variables. Also, it was found that in the long run total government expenditure negatively affect economic growth. It was further realized that foreign aid and exchange rate negatively related to economic growth in the long run. Gross fixed capital formation, inflation and trade openness positively affect economic growth in the long run. It was also found that most of the short run results were consistent with the long run results. The findings also shown that there is bi-directional causal relationship between government expenditure and economic growth. The model for the study is free of serial correlation and heteroscedaticity and the model was stable over time as confirmed by cumulative sum (CUSUM) and CUSUMSQ results.