Government Expenditure-Growth Nexus: Evidence from Namibia

Abstract

The paper is motivated by the two theoretical divergent views on direction of causality between government expenditure and economic growth based on Wagner’s law that higher growth rates are expected to induce higher levels of government expenditure and Keynesian hypothesis that higher levels of government spending are expected to drive economic growth. Using the annual time series data for the period 1980 to 2013 the paper investigates the long-run and causal relationship between government expenditure and economic growth in Namibia using the ARDL bounds test approach. As per the cointegration results there exists a long-run relationship between government expenditure and economic growth in Namibia. Granger causality results indicate that economic growth drives and fuels government expenditure only in the short-run. Government expenditure, however, amplifies and catalyses economic growth both in the short-run and long-run in Namibia. Hence policies aimed at enhancing economic growth in Namibia both in the short-run and long-run should stimulate and spur meaningful government expenditure levels, but at the same time should not compromise on the price stability since excessive public spending may be inflationary.

Keywords: ARDL Bounds Test Approach, Granger Causality, Government Expenditure, Economic Growth, Namibia