The sustainability of budget deficit and public debt on Ghanaian economy growth: The government intertemporal budget

Abstract

Purpose

The main objective of this study was to examine the sustainability of budget deficits and public debt in the Ghanaian economy. This study utilised the GDP growth rate as an indicator of economic growth, functioning as the dependent variable. Public debt levels and budget deficits were identified as the principal independent variables, but government expenditure and revenue were included as control variables to mitigate their potential impact on the analysis.

Design/methodology/approach

This study used annual time-series data from 1990 to 2021 for thirty-two years. This study employed dynamic OLS and ECM Models to examine the effects of budget deficits and public debt economic growth on long- and short-run relationships.

Findings

The results indicate that budget deficits and public debt negatively impact economic growth in the long run, but budget deficits are insignificant. This finding suggests that budget deficits and public debt are not sustainable over the long term. The results further reveal that budget deficits are sustainable in the short run relationship with economic growth, whereas public debt is not. Additionally, the results indicate that government expenditure and revenue negatively impact economic growth in the short-term.

Originality/Value

This study is the first to use intertemporal budget constraints to assess the Ghanaian economy's budget deficits and public debts. These results confirm Ghana's current economic status.

Practice Implications

The results will enable policymakers to review their debt management strategies to better distribute debt to profitable industries and activities while preventing inefficient use of resources.