Abstract:
The primary focuses of this study was to explain how Ethiopia’s economic growth affected government spending. The time series data utilized in the study were gathered between 1991 and 2021. Both descriptive and econometric techniques were employed for the purpose of analysis. Descriptive part deals about the general compositions and trends of public spending, the growth patterns of economy, and sectoral composition of national output. Econometric analysis is conducted by using Johansen Maximum Likelihood Estimation procedure. Before estimating the long run model, the time series characteristic of the data is tested using DF and ADF test and found that all the variables are integrated of order one. Then, the cointegration test was conducted and concluded that there is one co integrating equation between variables. Furthermore, the time series data were subjected to the Johansen cointegration test and the vector error correction model (VECM) in order to evaluate the short- and long-term correlations between public spending and economic growth in Ethiopia. The result revealed that all components of government expenditure do not have significant effect in explaining growth of real per capita income in the short run. Long-term economic growth is negatively impacted by government expenditure on agriculture, while short-term effects are negatively impacted and considerable. Both in the short and long terms, spending on health has a favorable and considerable impact on economic growth. According to the study, government spending on the education sector would help to foster the conditions that could result in higher labor force participation rates and, consequently, higher rates of economic growth. Generally, public expenditure is important for economic growth but it needs adjustment to switch these expenditures form non-productive and lower significant areas to productive and more significant areas
