Examining Government Expenditure and Economic Growth in Ghana

Abstract

This study aimed to explore the impact of government expenditure on economic growth, particularly in the context of Ghana, and to examine the validity of the Wagnerian hypothesis. The observed positive long-term impact of government expenditure on economic growth underscores the role of public investment in infrastructure, education, healthcare, and other critical sectors. By allocating resources to these areas, governments can lay the foundation for sustainable economic development, enhance productivity, and improve living standards for citizens. Moreover, targeted government spending can stimulate aggregate demand, create employment opportunities, and fuel economic activity, particularly in times of economic downturns or recessions. However, the short-term negative impact of government expenditure on economic growth highlights the potential challenges associated with fiscal expansion, such as inflationary pressures, budget deficits, and crowding out effects. Excessive government spending without corresponding increases in productivity or revenue generation may lead to macroeconomic imbalances and undermine long-term growth prospects. Therefore, policymakers must strike a balance between stimulating economic growth through public investment and ensuring fiscal sustainability. Furthermore, the finding that government expenditure does not significantly contribute to private sector investment underscores the importance of creating an enabling environment for business growth and investment. While government spending can complement private sector activity through infrastructure development and public-private partnerships, it is essential to address regulatory barriers, improve governance, and enhance investor confidence to stimulate private sector-led growth. The validation of the Wagnerian hypothesis in Ghana suggests that as the economy expands, there is a tendency for government expenditure to increase, reflecting the growing demand for public goods and services. However, policymakers must exercise caution to ensure that government spending is allocated efficiently and effectively to maximize its impact on economic growth and development outcomes. The study's findings underscore the complex relationship between government expenditure and economic growth in Ghana. While public investment plays a crucial role in driving long-term development objectives, policymakers must adopt prudent fiscal policies, promote private sector participation, and enhance institutional capacity to achieve sustainable and inclusive growth. By doing so, Ghana can harness the potential of government expenditure as a catalyst for economic transformation and prosperity.