THE IMPACT OF PUBLIC SPENDING ON ECONOMIC GROWTH: THE CASE OF ETHIOPIA

Abstract

The rapid growth in government expenditure in Ethiopia has caused concern among policy makers on the implication of such growth. Over the two decades, government expenditure in the country grew at a faster rate. Given this fiscal scenario, an explanation of this requires studying the impact of government expenditure on economic growth. The general objectives of the study were to: investigate the impact of public spending on economic growth of Ethiopia. The data used were government expenditure components that included expenditure on agriculture, infrastructure, defense, and health care, Sources of data were Ethiopia government documents and international financial publications. The study applied restricted Vector Auto Regression estimation technique using annual time series data for the period 1975 to 2016 to evaluate the impact of government expenditure on economic growth. Both descriptive and econometric techniques were employed for the purpose of analysis. Before estimating the long run model, the time series characteristic of the data is tested using DF and ADF test and found that all the variables are stationary at first difference .Then Johansen co-integration tests revealed a long-run relationship between GDP growth rate and the selected components of government expenditure. Furthermore, VECM was latter estimated to determine the relationship dynamics. The result revealed that both in the long run and in the short run public spending on infrastructure and Defense promote economic growth where as public expenditure on agriculture and health were found to be negatively related to economic growth. All components of public expenditure have significant effect in explaining growth of RGDP except spending on health. The study concludes that the composition of government expenditure and public expenditure reform matter for economic growth.