Impact of Government Expenditure on Economic Growth of Ghana

Abstract

The paper focuses on the effect of government expenditure on economic growth in Ghana. The study sought to discover and analyze the effect of Government recurrent and capital expenditure on economic growth. The independent variables considered in this research constitute Government recurrent and capital expenditure while gross domestic product (GDP) is considered as dependent variable. The work is analyzed using time series data from 1972 to 2021. A unit root test is conducted to determine whether the time series variable is non-stationary and possesses a unit root. The results imply that capital government expenditure (GCE) has an important effect on GDP growth with a coefficient of 0.26160 (p < 0.01) meaning that a 1% increase in GCE results in a 0.26% increase in GDP. On the other hand, the coefficient for recurrent government expenditure (RGE) is given as 0.05581 with a p-value of 0.2664 which shows a positive relationship between GDP and RGE, but the p-value is also not significant. The Granger causality test indicates the presence of a bidirectional relationship between capital expenditure and economic growth while unidirectional causality from economic growth to recurrent expenditure. These results support the Keynesian perspective that more government involvement in the economy is associated with growth. However, the study also goes against the Peacock and Wiseman hypothesis, suggesting government spending is more responsive during crises than as an inner cause of economic growth. The study recommends that to achieve sustained economic growth, the government and policymakers should concentrate on investing in the basic infrastructure as they are catalysts for economic growth.