The Impact of Fiscal Policy on Economic Growth in Ghana

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This study examines the impact of fiscal policy on economic growth in Ghana. The examination is done by regressing economic growth on four fiscal variables and three non-fiscal variables. The fiscal variables considered in the study comprise taxes, government consumption expenditure, government investment expenditure and government transfer payments whilst private investments, labour force and terms of trade were considered for the non-fiscal category. The analysis is based on time series data covering the period 1981-2008. The study applies the DF-GLS test for stationarity and the bounds test approach to cointegration for the estimation of an autoregressive distributed lag model. The outcome of the bounds test supports the existence a long-run impact of the fiscal variables on economic growth. The empirical results suggest that in the long run government investments and government transfer payments affect economic growth positively whereas those of taxes and government consumption spending were shown to be negative. Similarly to that of the long run, government investments and transfer payments have positive effects on economic growth in the short run. The outcome also suggests that the effects of taxes and government consumption expenditures on short-run economic growth are both insignificant. However, the study recommends that budget policies in Ghana should be tailored towards reducing government consumption expenditure and raising those expenditures that enhance economic growth.
A thesis submitted to the Department of Economics in partial fulfillment of the requirements for the degree of MASTER OF ARTS (ECONOMICS),2012