Relationship between Public Expenditure and Inflation

Abstract

Effective management of inflation remains one of the arduous tasks for managers of global economies. Inflation remains a macroeconomic indicator whose management outcomes have the potential to decide the electoral fortunes of elected governments and determine the purchasing power of household incomes. The purpose of this research was to assess how a steady increase in public expenditure could impact inflationary levels. The quantitative approach to scientific inquiry was adapted and used in the research. Specifically, the cross-sectional design formed the basis of the research. Data required for the research were obtained mainly from secondary sources. These included textbooks, peer-reviewed articles published in journals and grey literature. Other sources were Google Search Engine, including Netcials, MacroTrends, and databases of the World Bank and Bank of Ghana, among other significant sources. Respective data on Ghana’s annual GDP values from 1960 through 2020, annual inflation data from 1965 through 2020, changes in annual inflation rates from 1965 through 2020, and annual public expenditure values from 1983 through 2020 were collected and used in the research. Descriptive statistics and regression models were used to describe the research variables and to evaluate their behaviour over the stated time frame on inflation. The study revealed lax monetary policy as the root cause of consistently high inflationary rates over considerable periods and remained a strong contributor to the weak purchasing power of national fiat currencies. Further, relative price distortions away from their economic equilibrium are not healthy for the economy, while disinflationary policies adapted for implementation should be contingent on the causes of inflation. The single largest cost of inflation to consumers is the erosion of income, whereas higher tax rates are not the panacea for the challenges of mounting public expenditure and public debts. Respective inflation rates recorded in Ghana during 2012 (7.13%) and 1995 (59.46%) remained the lowest and highest from 1993 through 2020. Fiscal periods 2017 through 2020, 2009 through 2012, and 2005 through 2008 recorded the respective best (9.33%), second-best (11.46%) and third-best (13.32%) annual average inflation rates. With the exception of 2013 through 2016, the performance of the Ghanaian economy in relation to annual average inflationary control witnessed improvements during the second political and administrative terms compared to the first terms. However, the best annual average inflation rate over an eight-year period during the Fourth Republic was recorded from 2009 through 2016 (13.45%). Findings from the research revealed a positive and significant relationship between public expenditure and inflation (coefficient value = 1.2004653; p = 0.004, p < 0.05). Public expenditure accounted for 21.30% of the variation in inflation rate from 1983 through 2020. Results from the statistical output validated the significant influence of public expenditure on inflationary hikes, the need for monetary and fiscal policies related to inflation control to be strategically reviewed and strengthened to improve implementation outcomes, and the potential of rising public expenditure to undermine the rigidity and robustness of economic fundamentals through an unexpected surge in inflationary levels. The findings underscored the need for managers of various global economies to be keen on “economic” public expenditure to the neglect of profligate public expenditure, so the socio-economic derivatives from investments in public infrastructure would strongly add to, rather than subtract from, national development and growth efforts. The fundamental objective of MPC should be pivoted around three cardinal functions: the creation of maximum employment, moderation of long-term interest rates and ensuring price stability. Excessive public expenditure requires careful consideration by economies that whet their national development appetite with increased public infrastructure projects.