Is Ghana’s Budget Deficit Sustainable? A Cointegration Analysis
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Date
FEBRUARY, 2011
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Abstract
The study evaluates budget deficit sustainability of Ghana between 1960 and 2007 using the present value budget constraint approach. By applying annual time series data, the ADF and PP tests for unit root rejected the null hypothesis at 1 percent significance level after first difference. Hence, both government expenditure and revenue of Ghana are stationary and integrated of order one. The Granger causality test supported a bi-directional causation such that both expenditure and revenue of Ghana have temporal precedence over each other. This means past and present values of government revenue provide important information to forecast future values of expenditure. The test for cointegration favoured the sustainability of budget deficit of Ghana at 10 percent significance level in the strong sense. In this case, government can continue to service its past accumulated deficits without large future correction to the balance of income and expenditure.
Again, the study achieved the conventional negative sign of the speed of adjustment to long run equilibrium following shocks to the system at 5 percent significance level. It indicates that 53 percent of disequilibrium is restored every year following shocks to the system. This means that any disequilibrium within the budget deficit of Ghana in the short run is quickly adjusted and converged back to equilibrium in the long term.
The CUSUM and CUSUM Q tests failed to detect the existence of possible structural breaks in the annual data of Ghana at 5 percent significance level. In this case, we conclude that government expenditure-GDP and revenue-GDP series during the study period exhibit stable long run cointegration. Hence, the budget deficit of Ghana is sustainable over the entire study period.
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A Thesis Presented to the Department of Economics, in Partial
Fulfillment of the Requirement for the
Award of Master of Arts
Degree in Economics