Government Expenditure on Economic Growth: Empirical Evidence from Ghana

Abstract

The role of the government in a market economy cannot be underestimated. In reality, the public sector plays significant role in an economy. Markets do fail sometimes, and for that reason, government intervention is needed to provide public goods or handle externalities and enforce competition in an economy. In the quest of government playing its role in an economy, it faces the challenge of an appropriate level of government size (government final consumption % of GDP) that can ensure sustained economic growth. Data on government fiscal behavior in Ghana over the last two decades generally shows a rising trend in government expenditure, yet the economic growth rate has not risen commensurately. The study set out to provide additional empirical evidence on the linkage between government size and economic growth in Ghana by a time series data analysis and to test the optimal threshold level of which government final consumption could lead to rapid growth in Ghana. The study concluded that total government expenditure has a direct positive impact on economic growth. As a result of that, the study recommended that government expenditure should not exceed the optimum threshold level of 0.114% to maximize economic growth. The study, therefore, advocates for fiscal discipline and control to keep government spending at the optimal level so as to trigger a positive ripple effect to other sectors of the economy and avoid a crowding out effect in the Ghanaian economy.