Abstract:
The government's fiscal policy involves the use of its expenditure and taxation policies to
achieve desired targets; this paper is however, based on the former.
Both the theoretical and empirical literature surrounding the relationship between
government activity and economic growth remain controversial to this day. Empirical
works including those of Ram (1986), Landau (1983, 1986) and Rubinson (1977) among
others have produced mixed results.
This study analyses the contribution of government expenditure to the economic growth
process in Ghana between 1970-1998. The results indicate that the aggregate government
expenditure variable is negatively and significantly associated with economic growth.
Although, the empirical results on the impact of government on economic growth is
inconclusive, a negative association with Ghana's economic growth was unexpected but
explicable. The choice of the size of government follows the approach adopted by Ram
(1986). The composition of government expenditure also has mixed impact on Ghana's
economic growth over the stipulated period. The growth rates of the expenditure
components (incrementalist approach) were employed in this research.
The results indicate that education expenditure and expenditures on roads and waterways
have the expected positive and significant impact on Ghana's economic growth over the
period under consideration. It is also clear that in a labour surplus economy such as
Ghana, the neo-classical labour force variable is not an important determinant of growth In addition, defence expenditure had a negative but insignificant impact on economic
growth. The other growth variables introduced in the model such as investment and
export had the expected positive signs in all the regressions undertaken. The study reveals
that the most robust variable for Ghana's economic growth is investment.
The proxy for the labour force variable (the rate of growth of population) had the
expected positive association with economic growth but insignificant. Interestingly, the
two political economy variables- political instability and the nature of government
(democracy or autocracy) are statistically insignificant in explaining Ghana's economic
growth (especially as the last seven years of the data set is biased towards democracy).
