Threshold Effect of Budget Deficits on Economic Growth in Ghana: An Empirical Analysis

Abstract

Fiscal policies in Ghana have consistently resulted in high deficits accompanied by low and uneven economic growth path for a long period of time. In this study, the author examines the threshold effect of budget deficit on economic growth in the Ghanaian case, using quarterly data from 2000–2012. The study found an inverse long run relationship between budget deficit and economic growth, especially as the deficits have often been used to finance recurrent expenditures, suggesting that high budget deficit, driven by recurrent expenditures, slows down economic growth. In the short run, however, the author found the budget deficit to promote economic growth, but a deficit beyond the threshold level of 4% of GDP was found to be detrimental to economic growth. This result was robust and supports the West African Monetary Zone’s (WAMZ) primary fiscal convergence criterion. The study therefore noted that fiscal restraint to the level below the threshold would both stimulate a sustainable economic growth and overall stability in Ghana.