Relationship between government expenditure and economic growth: evidence from Vanuatu

Abstract

This study examines the impact of government expenditure on economic growth in Vanuatu for the period 1981 to 2016. We first examined the effects of government expenditure on economic growth when government expenditure is financed by tax revenues, non-tax revenues, and budget deficit/surplus. Secondly, we examined the effects of government expenditure compositions on economic growth. Thirdly, we tested for weak exogeneity of fiscal factors on investment. We observed that fiscal factors and investment have causal effects on economic growth in Vanuatu. More specifically, government expenditure negatively influences long-run economic growth when financed by tax revenues, but positively influences long-run economic growth when financed by other sources such as non-tax revenues and budget surplus/deficit. We further noted that amongst expenditure compositions, expenditure on education, health, wages & salaries, agriculture, and interest payments individually has larger effects on the long-run economic growth than the remaining expenditure composition as a whole.