Impact of Government spending on Economic Growth in Tanzania

Mkama,, Charles (2017) Impact of Government spending on Economic Growth in Tanzania. Masters thesis, The Open University of Tanzania.

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Abstract

The study investigated the relationship between government sectoral expenditure (human capital, agriculture and defence) and economic growth in Tanzania over the period from 1985 to 2015. The study used annual time series data and applied co-integration and error correction model to examine the short run and long run relationship between GDP and government sectoral spending. The Granger causality test was also employed to investigate the direction of causal relationship between GDP and public sectoral spending. It is found that health and defence expenditures have both short run and long run positive significant effect on economic growth, while spending on education and defence have positive but insignificant effect on growth of economy. The Granger causality test revealed that there is unidirectional causality relationship running from economic growth to government expenditures, and bidirectional causality relationship between health and economic growth. These results have policy implication that economic growth can be improved significantly when the ratio of public expenditure on health and defence sectors to total expenditure increases. Such improvement has a large impact on improvement of human productivity and offers predictable environment for investment which leads to improved national output. Also the government should focus on well-defined expenditure policies that identify the unproductive and productive investments, and efficient management of resources in development of education, health, agriculture and defence should be emphasized.

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