Economic Growth and Government Spending Nexus: Empirical Evidence from Lesotho

Abstract

This study examines the long-run and causal relationship between government spending and economic growth in Lesotho using the ARDL bounds testing procedure for the period 1980 to 2012. Although several studies, have investigated causality between government expenditure and economic growth, none explored differentiating short run and long run causality. The results of our study indicate a stable long-term relationship between government spending and economic growth in Lesotho. However, the Granger causality test shows the direction running from economic growth to government expenditure, confirming Wagner’s Law in Lesotho. In addition, the outcomes of this study fail to support the Keynesian theory. The results highlight the need for policy makers to shift public outlays towards investment in physical infrastructure which will stimulate growth and consequently improve fiscal sustainability as opposed to recurrent expenditure.

Keywords: Economic Growth, Fiscal Policy, Cointegration, Causality, Wagner’ Law