EFFECT OF FISCAL POLICY ON ECONOMIC GROWTH IN SUB-SAHARAN AFRICA

EFFECT OF FISCAL POLICY ON ECONOMIC GROWTH IN SUB-SAHARAN AFRICA

ABSTRACT

Studiess on economic growth have provided insights into why States grow at different rates over time. Classical economics posits that economic growth is largely influenced by factors of production, particularly labour and capital. The proponents of the Classical school assert that the effect of government spending is temporary and not effective, particularly in the long-run, when prices adjust and output and employment are at their optimum levels. On the contrary, the Keynesian economics opine that public consumption has a positive effect on the economy. Most recently, endogenous growth economics asserts that government expenditure and taxation will have both temporary and permanent effects on economic growth. The debate on the effectiveness of fiscal policy as a tool for promoting growth and development remains inconclusive given the above positions as well as conflicting results of recent studies. Thus, the controversy is yet to be settled. Against this background, therefore, this study sought to determine: (i) the effect of government productive expenditure on the economic growth of sub-Saharan African countries, (ii) the effect of government unproductive expenditure on the economic growth of sub-Saharan African countries, (iii) the effect of distortionary tax on the economic growth of sub-Saharan African countries, (iv) ) the effect of non-distortionary tax on the economic growth of sub-Saharan African countries, and (v) the effect of budget surplus on the economic growth of sub-Saharan African Countries. The ex-post facto research design was adopted which enabled the study to make use of secondary data of sub-Saharan African Countries in panel least squares. The hypotheses were linearly modelled while adopting the panel data estimation under the fixed-effect assumptions. Findings reveal that Government productive and unproductive expenditures have a negative and significant effect on the economic growth of sub-Saharan African countries, while distortionary tax (a proportional tax on output at rate) and non-distortionary taxes has a positive and significant effect on the economic growth of sub-Saharan African countries. Findings also revealed the budget balances of sub-Saharan African countries have a positive and insignificant effect on the economic growth of sub-Saharan African countries. The study therefore recommends that Governments of sub-Saharan African countries should engage in more productive and unproductive expenditures while improving on the mechanisms for the collection of distortionary and non-distortionary taxes for enhanced economic growth.