The Impact of Government Expenditure on Economic Growth in Ghana
CHAPTER ONE
Objectives of the study
The main objective of this study is to empirically examine the impact of government expenditure on economic growth in Ghana. The specific objectives of the study are as follows:
- To investigate the impact of government expenditure on economic growth in Ghana.
- To evaluate the long-run relationship between government expenditure and economic growth in Ghana.
- To make policy conclusions and recommendations based on the results of the study.
CHAPTER TWO
LITERATURE REVIEW
Conceptual Framework
Brief overview of GHANA’S economy
Ghana was the first sub-Sahara country to gain independence (1957). In the early 1990s, after a long period of military rule, Ghana became a democratic state. Since then, it has been regarded as one of the most stable African democracies. The level of corruption is quite low, there are no violent conflicts and the macroeconomic structure is relatively strong. GDP is around US$38.24 billion, while the total state revenues, including grants, are approximately 30% of GDP. The main export products are gold and cocoa (UNDP 2010).
In a developing economy like Ghana, government intervention is necessary for accelerated economic growth. Despite the significance of monetary policies, government fiscal policies are essential tools that could be used to stimulate economic growth. The fact that we have organised and non-organised money market in Ghana makes monetary policies inactive relative to fiscal policies. Thus, there is a need for government to generate the means to create the social and economic infrastructures thereby stimulating private investment (Tanzi 1994).
Over the years, the government of Ghana has increased its expenditure by expanding the road networks, implementing the National Health Insurance Scheme (NHIS), the Livelihood Empowerment Against Poverty (LEAP) and the introduction of the Single Spine Salary Structure, all with the aim of fostering economic growth and development.
According to the joint review of public expenditures and financial management (Mofep 2011) “ In the last decade, Ghana made significant progress to reduce income poverty and provide greater access to education and health services to its population. Accelerated economic growth, the abolition of school fees and the creation of the National Health Insurance Scheme (NHIS) significantly contributed to such progress”.
There are several fiscal policy instruments that could be adopted by the government of Ghana. The focus of this study will be on government expenditure which is critical in the economic growth process of less developed countries. Economists are not in harmony on the real impacts of government expenditure on economic growth. Various empirical studies for instance; Nketiah-Amponsah (2009) have shown that there is neither a general consensus nor consistent evidence regarding the significant relationship between government expenditure and economic growth.
CHAPTER THREE
RESEARCH METHODOLOGY
Research Design
The study examines the impact of government expenditure on economic growth in Ghana 1981-2016. The methodology of this study is essentially econometric analysis which will be used to estimate and analyze the influence of the explanatory variables; Government Capital Expenditure (GCE), Government Recurrent Expenditure (GRE) and Nominal Gross Domestic Product (GDP) at current price.
For this study, ex post facto research design is adopted. This is because the study attempts to explore cause and affect relationships where causes already exist and cannot be manipulated. Ex-post facto research is systematic empirical inquiry in which the scientist does not have direct control of independent variables because their manifestations have already occurred or because they are inherently not manipulated. Inferences about relations among variables are made, without direct intervention, from commitment variables of independent and dependent variables.
This research work embraces the use of secondary time series data in examining the macroeconomic impact of the activities of government expenditure on Economic Growth of Ghana.
CHAPTER FOUR
PRESENTATION AND ANALYSIS OF RESULTS
Having estimated the model, the variables considered are gross domestic product (dependent variable) and government re-current expenditure (GRE) and government capital expenditure (GCE) was both used as the Independence variables. The result covers the period year of 1981-2016.
From the table VECM (-1) was consistent by assuming a negative values. It suggests that the VECM could correct any deviations from long-run equilibrium relationship between GDP and the explanatory variables. The co-efficient indicates a speedy adjustment of 44 per annum. This implies that following short-run disequilibrium, 44% of the adjustment to the long-run takes places within one year. The above result shows that the R2 is 0.67, which shows that the model explains about 67% of the total variations in GDP are explained by the independent variables during the period of the study.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Summary of the Findings
This research work investigated the impact of government expenditure on the economic growth of Ghana. An in-depth analysis of the works of other scholars was also carried out. The result of this investigation indicates that changes in government spending are responsible for the negativity in the economic performance of Ghana within the sample period under review.
In order to capture the impact of government spending both current and capital expenditure of government was analysed in this work to ascertain its impact on the economic growth of Ghana. It was also discovered that both has negative impact on the economic growth.
Hence, increase in government expenditure decreases the economic growth which do not conforms to the theoretical literature. During the course of the study, the following were discovered: in order to investigate properly the link between government expenditure and Ghana economic growth led the researcher to test for the following.
The result of the co-integration test show that there is a sustainable long-run relationship (i.e steady-stated path) between real gross domestic product (RGDP) and government recurrent and capital expenditure (GRE, GCE)
The error correction mechanism result indicates that the coefficient of error correction term is -0.44. This shows that 44% of the errors in the short run are corrected each year. Thus, the coefficient captures the speed for adjustment at which the short-run of GDP ties with its long-run equilibrium.
The unit root test result shows that the entire variables are stationary at first difference and different from one.
Hence, the result of the regression can be fully relied on for making policy analysis and recommendation. The entire regression plan was statistically significant. This means that the joint influence of the explanatory variables (GRE and GCE) on the dependent variable (GDP) is statistically significant.
The result of the coefficient of multiple determination show that 67% of the variation in economic growth (GDP) are explained by the variation of the explanatory variables namely; government recurrent expenditure (GRE) and government capital expenditure (GCE), while the remaining 33% is explained by variable not included in the model.
Conclusion
This study has been able to unravel the puzzle of government expenditure on economic growth Ghana. From the findings, it was discovered that the revenue base is a key variable in the explanation of the size of the public sector. Public expenditure has strong negative link with output growth in the short-run, which means that public expenditure is growth propeller if managed well, government recurrent expenditure (GRE) and government capital expenditure (GCE) shocks were observed also to influence other variables (indicators) in the economy the propel growth. It was also observed that there exist a long-run relationship between the recurrent and capital expenditures and other growth in Ghana.
The impact of sectorial expenditures of government on output growth revealed a lot expenditures on various sector of the economy do not reflect due to the influence of possible problems of improper implementation of the policies.
Recommendations
In the light of the research findings, the following recommendations are presented:
- The government should also restructure its various organs of public administration in order to engender efficiency and effectiveness in service delivery in the cause of its spending.
- To ensure macroeconomic stability and to put Ghana economy along the path of sustainable growth and development, the government should aim at an efficient level of public expenditure.
- The government should through its strategic spending, create a good economic and investment climate in order to attract more foreign investors.
- Since fraud and public funds embezzlement (among other factors) have become the bane of Ghana’s economic growth and development over the years, public funds embezzlement should attract a more severe penalty as disincentive to those who see public office as a spring board to lead fast to a height of wealth and self-actualization at the expense of the impoverished majority.
- The government should further collaborate with the private sector in the provision of education and health services and the use of education and health services and the use of public-private-partnership (PPP) should be encouraged to deliver better returns in the area of the provision of infrastructure.
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