Government Expenditure and Economic Growth Nexus in Tanzania

Abstract

This paper empirically investigates how government consumption impacts upon economic growth in Tanzania for the period 1967 – 2020. Autoregressive Distributed Lag (ARDL) bounds cointegration test revealed economic growth and government expenditure were cointegrated, given the conditioning factors; and, revealed a small but statistically significant positive long run effect of government size on economic growth. The pairwise Granger causality test rejected the null hypothesis of no uni-directional or bi-directional causality between the government size and economic growth. The study also established the long run effect of inflation on economic growth was negative and statistically significant. The ECM results reveal the short run effect of government size on economic growth was negative and statistically insignificant; and, the effect of private investment on economic growth was positive and statistically insignificant. Besides, the short run effect of human capital on economic growth was negative and weakly significant. The results revealed a high speed of adjustment from disequilibrium to long run equilibrium. The findings support the conventional view:  government consumption lacks significant positive effect on growth over the long run. This finding reveals the limit to the use of fiscal policy especially recourse to government expenditure to prime or stabilize the economy as maintained in Keynesian macroeconomic theory. The gestation period of government consumption is long. Furthermore, the finding underscore importance of price stability and, other things being constant, need for more proactive policies and strategies to avail business and macroeconomic environment that would increase private investment.