Abstract

The study examines the effect of government expenditure on the economic growth of Cameroon. The model specifies economic growth measured by gross domestic product as dependent on government expenditure proxy by educational expenditure and health expenditure. Annual time series data from World Bank 1990-2022 was sourced using secondary data and analyzed using ordinary least squared estimation technique.

It was evidenced that government expenditure has a significant positive impact on economic growth. Both educational expenditure and health expenditure have a significant effect on the economic growth of the country. The study demonstrates that increasing government expenditure reaps the static and dynamic benefits, stimulating rapid national economic growth.

Thus recommendations that any expenditure incurred by the government should be used for income generating projects so that expenditures should be easily covered. Also the government should encourage domestic investments by subsidizing local industries. Again, the government should try and inject funds into the industrial and service sectors since they are sectors that work hand in hand for quick development.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Government expenditure remains an important instrument utilised in the process of development. It plays a pivotal role in the functioning of any economy at almost all stages of growth and development.

Most developing and developed countries today use public expenditure to improve income distribution, direct the allocation of resources in desired areas, and influence the composition of national income (Assi et al., 2019; Vtyurina, 2020; World Bank, 2008). In developing countries for instance, the variation in government spending pattern is not only projected to guarantee stabilization but also to spur economic growth and expand employment opportunities (World Bank, 2015).

The role of any government is to provide goods and services to the public to achieve different economic and social objectives. The efficiency with which governments provide these goods and services is important to the macroeconomic stabilization, economic growth and also to the policy makers who want to know which sector to spend more or less in order to speed up the economic growth in the country.

Government expenditure comprises of the recurrent expenditures and development expenditures. Government development expenditures are those devoted for the purposes of carrying out various governmental projects which are designed to improve the growth of the economy. Some other factors that contribute to economic growth of a country have been identified by economists to include the growth in economic productivity, the number of equipment and number of workers.

The role of government in economic growth is an issue of debate since the time of Adam Smith. Recent wave of privatization in many developing and developed countries is based on perceptions that, “for sustainable development and efficient output, the role of government in economic policies should be reduced”(Kakar, 2011). Economists are of two different views about the role of government in economic activities. According to the neoclassical economists, reducing the role of private sector by crowding-out effect is important because it reduces the inflation in the economy; increase in public debt, increases the interest rate which reduces inflation in the economy as well as output.

The new-Keynesians present the multiplier effect in response and argue that the increase in government expenditure will increase demand and thus increase economic growth. The vision of ensuring sustainable economic development and reduction of mass poverty is enshrined, in one way or another, in the government’s development strategy documents of virtually all developing economies. In this respect, economic growth, which is the annual rate of increase in a nation’s real GDP, is taken as main objective for overcoming persistent poverty and offering hope for the possible improvement of society (Kakar, 2011).

The relationship between government expenditure and economic growth has continued to generate a series of controversies. While some researchers conclude that the effect of government expenditure on economic growth is negative and insignificant (Akpan, 2005) and (Romer, 1990), others indicate that the effect is positive and significant (Korman and Bratimaserene, 2007) and (Gregorious and Ghosh, 2007).

Government expenditure on investment and productive activities is expected to contribute positively to economic growth, while government consumption spending is expected to be growth retarding. This instrument of fiscal policy promotes economic growth in the sense that public investment contributes to capital accumulation. Other importance of government expenditure includes the provision of those facilities that are not fully covered by the market economy such as health and education. That is, human capital promotes positive benefits associated with economic growth, but the financial source for public expenditure which is taxation, reduces the benefits of the taxpayers and as such reduces the benefits associated with economic growth (Barro, 1990).

This study being based on Cameroon, the issue of government spending should be addressed in a concrete and pragmatic manner in order to conceive an effective spending plan in Cameroon, a point of departure of this study in a country in which the relationship between government spending and growth does not seem to be verified as shown in the data of  MINEPAT (2017) which shows an increase in the public investment budget from 28.28% to  29.57% between 2011 and 2013, with the vice of under-consumption as from the year 2014.

In addition, the financial resources intended for public investment in Cameroon will for the first time exceed 1000 billion CFAF following the launching of the three year plan for the reduction of poverty and the building of sites linked to the organization of the 2016 and 2019 African Nations Cup of football. These resources amounted to 1246 billion CFAF in 2015 (representing 31.2% of the total amount), and 1525 billion CFAF in 2016, i.e. 36% of the total budget (MINEPAT, 2017).

Government investment spending affects economic growth in Cameroon through its long-run effects on education, health, theoretical scientific research and physical infrastructures. This is based on the fact that the public investment budget, besides private investment, is one of the engines of economic growth wealth creation.

The resources of the public investment budget are massively dedicated to the financing of major structural projects (roads, hydro-electricity dams, Kribi deep-sea port….) as well as social micro-projects (classrooms, bore-holes and wells, health centers) that improve the living conditions of the population.

In Cameroon, the actions to be carried-out converge towards the resolution of the problems of production, distribution and transportation on the basis of the three Musgravian functions of the State which are: the function of allocation of the resources, the function of distribution (redistribution and transfer of welfare) and the function of stabilization (regulation and economic policy).

The carrying out of these missions is done by means of the State budget which includes the set of government income and expenditure. This new approach is primarily reflected through the increased autonomisation of the public investment budget as an instrument for the achievement of the policies of the authorities.

Despite the fact that public investment spending attained 35% in the total State budget, the target necessary to fuel growth as defined in the GESP is not yet achieved. The IMF recently carried out a detailed study on the importance of government investment. This study shows that after one year, a growth public investment equivalent to 1% of the GDP leads to an increase in GDP of 0.4%.

After four years, this impact reaches 1.5% (the IMF, 2014). The share of public investment in the public investment budget of the State of Cameroon witnessed a growth of 124.38% between 2011 and 2016, bringing to 36% the share of public investment in the total government spending 2016.

Public expenditure in Cameroon is usually divided into recurrent and capital expenditure. Suffice it to say that recurrent expenditure are payments for non-repayable transactions within one year while capital expenditure are payments for non-financial assets used in the production process for more than one year.

Over the past decades, the public sector spending has been increasing in geometric terms through government various activities and interactions with its Ministries, Departments and Agencies. In july 2016, public spending stood at 464.10XAF Billionbut saw a drastic increase by july of 2019 to 521.7BXAF Billion (Trading Economies.com/Institut National de la Statistique). In the words of Taiwo and Abayomi (2011), the size and structure of public expenditure will determine the pattern and form of growth in the output of the economy.

In Cameroon, the recurrent expenditure of the government include expenses on administration, wages, salaries, interest on loan, maintenance etc, whereas expenses on capital project include roads, airports, education, telecommunication, electricity generation etc. Both capital and recurrent expenditure that constitute the public expenditure recorded a steady increase during the past decade and especially from the year of 2016 to date. The steady increase would be as a result of the political unrest that was witnessed within the aforementioned period.

The effect of government spending on economic growth is still an unresolved issue theoretically as well as empirically. Although the theoretical positions on the subject are quite diverse. Few empirical studies report positive and significant relation between government spending and economic growth while several others find significantly negative or no relation between an increase in government spending and growth in real output (Olapade &Olapade, 2010).

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