Assessing the Dynamic Interlinks between Government Expenditure and Government Expenditure Financing Modes �Evidence from Ghana

One of the issues in economics which has continued to receive profound attention is fiscal management. This is because it is believed that the quality of the fiscal management within a given economy has far reaching implications for the health of that economy. In developing countries especially, fiscal policy and management have persistently undermined their growth and development prospects. This study aims at adding to the existing knowledge on fiscal behaviors, using the Ghanaian situation, particularly identifying the effects of the government borrowing modes on government spending and revenue mobilization behaviour by proposing that the effects of the borrowing modes on the revenue streams may not necessarily be the same. The study modifies the Franco-Rodriguez government utility maximization function and employs the vector autoregressive (VAR) system to establish the dynamic links among the borrowing modes, the revenue channels and government spending. Two variants of the modelaggregated and disaggregated government expenditure models are analyzed. Whilst one long run equilibrium relationship is uncovered in respect of government consumption expenditure for the disaggregated model, in the aggregate government expenditure model, two long run relationships are established for government expenditure and external borrowing. The long run estimates for government consumption expenditure indicate that it is inversely related to government capital expenditure, direct taxes, indirect taxes and domestic borrowing. In the short run, we discover that the impacts of the borrowing modes on the tax channels are different and it is recommended that in looking at how to manage the responses of these tax channels to borrowing, tax policy initiators take this into account in fashioning appropriate policies. Keywordsː aid allusion, borrowing, co integration, fungibility, vector auto regression Introduction Throughout the world, government expenditure remains an avenue that provides a strong impetus for spurring economic growth and indeed it is the government expenditure outlays in every economy that enable the state to create the necessary infrastructure and the relevant institutional mechanisms to support the multiplicity of economic activities across the spectrum. Whilst it is recognized that the government expenditure is critical in every economy, it must also be noted that such expenditures are usually greatly influenced by the financing channels through which the expenditures are derived. Much as it is true that the trajectory of government expenditure has riposte on the various financing modes, it is also equally an established fact that these financing modes can affect each other .In the literature, there is seem to be a general view that government expenditure must as much as possible be financed from the conventional sourcesdirect and indirect tax as well as non-tax revenues. However, in the developing world especially, it has become customary to leverage on borrowing modes as a way of meeting the government expenditure levels required in the budget plans as the conventional revenue raising mechanisms always fall way short of the intended targets sufficient enough for the government operations to be pursued seamlessly. 1 Department of Banking and Finance, School of Business, University of Education, Winneba, Ghana, E-mail˸ attaanamane@yahoo.com/eaanaman@uew.edu.gh 48 Journal of Finance and Bank Management, Vol. 7, No. 2, December 2019 Within these contexts, there has emerged a strand of empirical research which seeks to examine the fiscal behaviours of governments and in particular how the availability of the borrowing modes dampens the resolve of the fiscal authorities to be up and doing and maximize revenues. This is well-articulated in the early studies in fiscal behaviours; Griffin (1970), Heller (1975) and Mosley et al.(1987) etc. One important aspect of this discussion centers on the aid effect on the other financing modes and government expenditure itself. According to Osei, Morrissey and Lloyd (2005), studies on the effects of aid on fiscal behaviour can generally be categorized into those which direct their attention at investigating the effects of aid on the composition of government expenditure and those which in addition to examining the effect of aid on the allocation of government expenditures also assess aid effect on tax effort and government borrowing. In Ghana, just as in a lot of the developing countries, the pressure on successive governments to meet the aspirations of the citizenry has meant that government has to go out of the way to find the needed resources to ensure that programmes and projects are duly executed even against the backdrop of insufficient revenue generated and this situation has persisted for a long time. There are some who believe strongly that this has continued to exist because of the opportunity which is always open for the government to look anywhere to fund its activities even though government could be more prudent in staying reasonably within its revenues limits or aggressively pursuing the much needed tax reforms which could result in enhanced revenue collection. A number of questions thus arise. Does the availability of other government expenditure financing modes encourage government to continue to increase expenditure? Do aid and borrowing dampen tax revenue generation? Do grants and borrowing trigger differential fiscal behaviour by government? Again, how does the availability of the non-tax government expenditure financing modes influence the allocation of government expenditure? Gleaning the literature, it is obvious that contemporary studies in this arena have moved forward the frontiers of knowledge established by the earlier ones, eg Griffin (1970), Heller (1975) and Mosley et al (1987) and Khilji and Zampelli (1994). The most recent study conducted within the Ethiopian context by Mascagni and Timmis (2014) develops a model of fiscal behaviour encompassing tax and non-tax revenues, government expenditure, grants and loans which modifies Osei et al (2005) and Lloyd et al (2009) which include government (capital and recurrent), total tax revenue and domestic borrowing for the former and foreign financing, capital expenditure, recurrent expenditure, tax revenue and domestic borrowing in the case of the latter. In these studies, the researchers did not avert their minds to the fact that the dynamics may not possibly be the same if the tax financing source is disaggregated into direct and indirect tax channels. In other words, in this study apart from categorizing aid as grants and loans, we also include direct and indirect tax financing as separate variables. This is because we believe that aid and borrowing may not necessarily have the same effects on direct and indirect taxes. Thus the main difference between the present study on one hand and that of Osei et al (2003) and other previous but related studies on the other hand is that it we introduce the hypothesis that the responses of direct and indirect taxes respectively to borrowing-both external and domestic are different and also have the benefit of current data for the analysis to determine whether prevailing circumstances deviates from Osei et al(2003). The rest of the paper would be arranged in the following manner; Section II is devoted to examining the fiscal policy environment, trends in fiscal management and borrowing by the government of Ghana over the years. In section III, we proceed to discuss the theoretical and empirical issues relating to fiscal behaviour by government especially focusing on aid and borrowing and their effects on government fiscal management. Section IV sets out the econometric approach and a brief description of the data set for the empirical analysis whilst Section V reports the results of the data analysis and proceeds to discuss them. Finally, section VI covers the synopsis and conclusions from the study. Section IIː Trends in Fiscal management in Ghana When one does a careful study of fiscal policy in Ghana, one can identify clear, distinct periods of unique fiscal behaviours? In the main, the periods the early 1960s to the late 1960s, 1969-1972, 1972-1983, 1983-1991 and from 1992 to the present can be associated with peculiar fiscal behaviours though in some of the periods the fiscal management approaches appear similar. In the sixties, with the emergence of the country from colonial rule there was an urgent need for the government to put in place structures of state and build critical infrastructure like educational and health institutions while also embarking on rapid industrialization and modernization and as such, government committed massive public expenditures into achieving these objectives. During this period, a good chunk of the expenditures were financed from domestic sources with very little coming by way of aid inflows. Emmanuel Atta Anaman 49 The succeeding period however saw a modification of fiscal behaviour as government substantially disengaged from the previously pervasive role of the government in the economy, in line with the philosophy of the people in authority at the time and by virtue of the programme that they entered into with the Bretton Woods institutions, government at the time embarked on privatization of a good number of the state enterprises. Osei et al(2003) submit that from the 1960s to early 1970s , aid inflow was relatively insignificant and constituted about 2% of GDP and roughly around 12% of all revenues available to government. In the middle to the late 1970s, there was a shift in the behaviour of the government as government activities were driven essentially by monetary expansion through borrowing from the Bank of Ghana as domestic revenues sharply reduced on account of the decline in the real side economic activities precipitated by inappropriate policies introduced by the then military rulers coupled with adverse economic and