The Long Term Impact of Budget Deficits on Economic Growth In Ghana

Abstract

There has been a long- running debate as to the benefits or otherwise of budget deficits in Ghana. Since the socialist agenda of the first republic, budget deficits have been a common feature of the economic management of the country. This paper explores the long-run impact of budget deficits on the economic growth of Ghana. The Johansen cointegration procedure has been explored to determine the long-run relationship between the explanatory variables and growth with a hypothesized test that budget deficits have no significant long-run impact on economic growth. The Granger Causality test has also been utilized as further test for the relationship between economic growth and budget deficit. There were significant positive long-run relationships between the capital stock, openness, total government expenditure and the growth rate. The coefficient of budget deficit variable was also positive and statistically significant. The Granger causality test also showed a rejection of the null hypothesis in favour of the alternative. Thus, the paper concludes that budget deficits have a positive significant relationship with growth in Ghana. Government policy must, however, be to use the budget to create the necessary public investments in capital goods that have the necessary linkages with agriculture and industry to generate good future returns. There is also the need to invest in human resource to equip the labour force with the required skills for improved productivity.

Key words: Budget Deficit, economic growth