Impact of Government Spending on Economic Growth in Ethiopia: Time Series Analysis

The objective of this study was to investigate the impact of government expenditure on economic growth using time series data from 1970 to 2019 in Ethiopia. To this end, unrestricted error correction model (UECM) and single equation autoregressive distributed lag model (ARDL) was used to identify short run and long run impact of government expenditure on economic growth respectively. The estimation result envisaged that capital expenditure has distorting effect in the short run, while it promotes growth in the long run. The study also revealed that government recurrent expenditure has positive effect in the short run, but has no positive effect and implication on growth in the long run. Similarly, debt financed capital expenditure crowd in economic growth in the short run even though it crowds out economic growth in the long run. Therefore, government should pay due attention to development project management to enhance the effectiveness of capital expenditure in achieving sustainable economic growth and closely supervise the adverse effect of recurrent expenditure to maintain macroeconomic stability.