Effect of Public Spending on Economic Growth

Abstract

The component of total economic output that often attracts the attention of economists and remains the most deeply analysed is public spending. Most economists across the globe have advanced arguments to buttress the need for minimal government interventions in economic activities and the need to moderate government spending. The main purpose of this research was to examine how consistent increases in public spending could impact economic growth. The quantitative approach to scientific inquiry was adapted and used in the research. Specifically, the cross-sectional design formed the basis of the research. Data required for the study were obtained mainly from secondary sources. These included textbooks, peer-reviewed articles published in journals and grey literature. Other sources were Google Search Engine, including Netcials, MacroTrends, Population Matters, OECD, and databases of the World Bank and Bank of Ghana, among other significant sources. Respective data on Ghana’s annual GDP values and growth rates from 1983 through 2020, annual population data from 1983 through 2020, and annual public spending values from 1983 through 2020 were collected and used in the research. Descriptive statistics and regression models were used to describe the research variables and to evaluate their behaviour over the stated time frame on economic growth. The research revealed a non-record of negative economic growth from 1984 through 2020, with the lowest growth rate recorded during 2020 (0.88%) and the highest during 2011 (14.05%). Marginal increases and decreases in GDP growth rates were recorded from 1985 through 2007. Respective performances of the Ghanaian economy from 2013 to 2016 and from 2017 to 2020 culminated in respective average growth rates of 3.96% and 5.44%, which were lower than the average recorded from 2009 through 2012 (9.02%). The research further revealed a consistent surge in public spending during periods of general elections relative to the immediate-preceding fiscal years. Average public spending values from 2013 to 2016 and from 2017 to 2020 were US$10.349 billion and US$13.535 billion. Poverty is a by-product of political and economic injustice and not a consequence of limited resources at the national and global levels. Since public sector operations and functions in global economies, including Ghana, are characterised by gross inefficiency, the fundamentals of growth championed by increased public spending are believed to be non-resilient and non-robust enough to assure economic growth sustainability in the long run. Findings from the research revealed a positive but non-significant relationship between public spending and economic growth (coefficient value = 0.044575771; p = 0.462, p > 0.05). Public spending accounted for only 1.51% of the variation in economic growth from 1983 through 2020. The statistical outputs validated the relevance of the share of public spending in GDP, non-dominance of public spending in economic wealth creation strategy, non-excess allocation of limited resources to unproductive sectors, minimal effect of transaction costs on public spending, and mild effect of public spending on the rigidity and robustness of the Ghanaian economy and growth thereof. The study called for increased capacity of various governments through due diligence to limit the extent of laissez-faire that clouds public sector functions and operations; urgent implementation of the smart growth strategy by economies that are yet to have a firm grip of its implementation; review of public sector policy with excessive reliance on longevity of active service as the basis of service recognition and promotion. This would encourage innovation, creative thinking, and competition in the public sector, and it would project the public sector in a positive light. The research also called for the application of meticulousness to the identification and resolution of simmering challenges that cause the public sector to play second-fiddle to the private sector in terms of economic utilisation of limited available resources.