Consequential Effects of Budget Deficit on Economic Growth: Empirical Evidence from Ghana

The study evaluates budget deficit sustainability of Ghana between 1960 and 2010 using the present value budget constraint approach. By applying annual time series data, the ADF and PP tests for unit root rejected the null hypothesis at 1 percent significance level after first difference. Hence, both government expenditure and revenue of Ghana are stationary and integrated of order one. The Granger causality test supported a bi-directional causation such that both expenditure and revenue of Ghana have temporal precedence over each other. This means past and present values of government revenue provide important information to forecast future values of expenditure. The test for cointegration favored the sustainability of budget deficit of Ghana at 10 percent significance level in the strong sense. In this case, government can continue to service its past accumulated deficits without large future correction to the balance of income and expenditure. Again, the study achieved the conventional negative sign of the speed of adjustment to long run equilibrium following shocks to the system at 5 percent significance level.