Can Governments Enhance Long-run Growth by Reallocating Public Expenditure? Empirical Evidence from Tanzania

Abstract

This study examines whether the government of Tanzania can enhance long-run economic growth by changing the composition of public expenditure. The Johansen’s maximum likelihood method is used to test for co-integration and then estimate the long-run relationship. The study shows that while government spending on physical and human capital investments has positive impact on economic growth, government spending on consumptions has negative effect on economic growth. Moreover, the results reveal that switching expenditure from consumption to physical and human capital investments enhance economic growth, but the opposite is growth retarding. The study, however, found no evidence of output costs associated with a bilateral switch between physical investment spending and human capital investment spending.