Fiscal policy, private investment and economic growth: the case of Ghana

Abstract

Purpose – This paper aims to examine the relationship between disaggregated government fiscal policy variables; private capital investment and economic growth in Ghana, as well as the similarities and differences in the impact of these variables on private investment (PI) and economic growth. Design/methodology/approach – Cointegration and error-correction models are used, with time series properties of the variables investigated using augmented Dickey-Fuller test and cointegration of the variables tested using Engel-Granger two step procedure. Findings – The findings indicate that changes in government recurrent expenditure, current government capital expenditure and international trade taxes are significant for growth while changes in tax on domestic goods and services, tax on international trade and tax on income and property matter for private capital investment. The major difference between the impact of fiscal policy on PI and economic growth, however, lies in the direction of the impact. Practical implications – Based on the findings of this study, it is recommended that different policies be pursued in the promotion of PI and economic growth. Also, given the low correlation between PI and economic growth, it is recommended that the Ghanaian private sector be focused on and fully developed in order to perform its role as an engine of growth. Originality/value – Growth has been shown to be influenced by government expenditure and international trade taxes while private capital investment is influenced by taxes on domestic goods and services, international trade and on income and property. Fiscal policy authorities will find these useful.