Public Spending and Economic Growth in Ghana: A Threshold Analysis

Abstract

Discussions on optimal government size in relation to economic growth remain a crucial topic in economic and political dialogues, given its relevance to government policy and economic performance. While Keynes postulates that government expenditure influences growth positively, empirical investigations in various geographical contexts have proven that the relationship might be more complex. This thesis investigated whether fiscal expenditure has a nonlinear relationship with national output in Ghana. The Auto Regressive Distributed Lag (ARDL) model was employed as an estimation technique due to its appropriateness in situations where variables are integrated of mixed order; hence, its widespread use. The empirical results indicated an estimated threshold of government expenditure at 13.15 percent and 14.47 percent in the long run and short run, respectively. Further, diagnostics and stability tests conducted affirmed the suitability of the model, as the results proved positive. The results of the empirical investigation implied that currently, government expenditure in Ghana is significantly above its threshold. Therefore, it was recommended that the Ghanaian parliament should enact a law that caps government expenditure at 14.47 percent of GDP, and ensure transparency in adherence to this law through quarterly reports produced by the Ministry of Finance.