Public spending, growth and poverty reduction: A Dynamic CGE Analysis for Ghana

Abstract

The objective of this study was to determine the differential impact of various government expenditures on economic growth and poverty reduction in Ghana using a dynamic computable general equilibrium model based on a social accounting matrix (SAM) for Ghana for the year 1999. Even though there is evidence to show that higher fiscal deficits resulting from the increase in public investment outlays 'crowd out' some private investment by raising interest rates, the overall impact points to increased real GDP on a net basis by removing physical bottlenecks of infrastructure and thereby raising the factor productivity of private investment. Two main lessons can be drawn from this study. First, various types of government spending have differential impacts on economic growth and poverty reduction, implying greater potential to improve efficiency of government spending by reallocation among sectors. Second, governments should reduce their spending on unproductive sectors and rather give priority to increasing its spending on production-enhancing investments such as education, health and infrastructure.