Government expenditure structural pattern and private sector consumer behaviour : the empirical evidence for Ghana (1955-1990)
This study has estimated the private consumption function for Ghana, by using the modified versions of the Bailey (1971) and Cerea (1982) models, the Kormendi (1983) model and the Tridimas (1992) model to cover the period from 1955 to 1990 inclusive. The structural components of government expenditure constituted the key explanatory variables. The results of the study indicated that government spending on defence (including administration) in Ghana consistently crowed out private consumption. But non-defence expenditure such as social services spending, generally exerted a positive influence on consumption, and so did the expenditure on welfare and community services. These results have implications for public expenditure review in Ghana, in terms of expenditure switching from the defence sector to the non-defence expenditure areas which have productive effects on consumption. This is particularly important if the private sector is to become the engine of growth as anticipated under the IMF-driven structural reforms to achieve economic liberalisation and privatisation in Ghana. The tax effect on consumption was significant, and negligibly small enough to provide an empirical support for the validity of the Ricardian Equivalence Proposition for Ghana. In essence, tax financing is equivalent to deficit financing, and the implied substitution between the two exacted a zero effect on consumption. Since consumers will not be affected, an expansionary tax policy is also recommended for Ghana, where existing tax base is low, suggesting a greater tax capacity. A negative wealth effect on consumption was realised for Ghana, possibly due to the under-developed nature of its financial asset market. But most likely, the relatively high inflationary setting reduced the real value of interest rates; thereby causing savings, and hence monetary wealth, to reduce, whilst consumption increased contemporaneously due to inflationary expectations.