Fiscal aggregates, government borrowing and economic growth in Ghana: An error correction approach

The relationship between fiscal policy and economic growth has been the subject of running arguments and debates among economic theorists and researchers for a long time. While some economists contend that fiscal policy inherently distracts growth, others believe it can spur growth. The objective of this paper was to examine and ascertain the nexus between fiscal policy and economic growth using the Ghanaian situation by employing a dynamic econometric approach and, by so doing, help in shaping knowledge in this domain. The study adopted the explanatory research design, and a quarterly data set was drawn from 1982 to 2014. The error correction model was used in two ways. The first approach was by using the co-integrating relationships, and the second was directly imposing long-run homogeneity, thus constructing the ECM without estimated parameters. The empirical analysis shows that there is a long-term relationship between government expenditure and economic growth; in the short run, however, both domestic borrowing and external borrowing have negative effects on economic growth, but growth in indirect taxes rather positively influences economic growth, going against the theoretical position that taxes have a distortionary effect on economic growth. The results also show that at least 14% of the innovations in economic growth can be attributed to movements in government expenditure. The dynamic effects of fiscal policy on growth from an error correction approach provide empirical evidence of reality, especially during an era when there is a debate in the country on the use of and the effectiveness of fiscal policy