Growth impact of government consumption, transfer and interest payments in Ghana

Abstract

The study examined the growth impact of government consumption, interest and transfer payments in Ghana. A quarterly time series data from 1984 to 2015 was utilised. The maximum likelihood estimation (MLE) technique was employed, and cointegration among the variables was established within the framework of autoregressive distributed lag (ARDL). A Pair-wise Granger-causality test was adopted to explore the direction of causality between government expenditure components (consumption, transfer and interest payments) and economic growth. The ARDL results revealed that government interest payments and consumption expenditure negatively impact economic growth in both long run and short run. However, government transfers indicated a positive significant relationship with growth of output. The results of the Granger causality test established a bi-directional causality between government interest payment and economic growth. Unidirectional causalities running from government consumption expenditure and transfer payment to economic growth were also established. Considering the findings, the following recommendations are offered: Government must ensure that loans taken are properly utilised so that returns from such use will be used to cater for the loans and the associated interest. Government should cut down its consumption. Lastly, government through the Department of Social Welfare should increase and regularize its general transfer payment in order to elevate the vulnerable groups from extreme poverty.