Government development expenditure and economic growth nexus in Uganda

Abstract

The study investigated the direction of causality as well as cause-effect relationship between development expenditure and Uganda’s economic growth using the Vector Autoregressive (VAR) model and the generalized method of movements (GMM) respectively. Quarterly data for the period 2008 quarter 3 to 2022 quarter 3 were used in the analysis. The data was sourced from Ministry of Finance, Planning and Economic Development and from Bank of Uganda. Findings from the VAR and the subsequent Granger Wald causality test results suggest that there is a uni-directional causality running from economic growth to development expenditure. Estimates from the GMM model indicate that whereas variations in development expenditure have no causal effect on Uganda’s economic growth, the variations in gross fixed capital formation and the variations in debt service had a significant influence on Uganda’s economic growth. On policy stance, we argue that Uganda’s economic growth could be enhanced from increased development expenditure if government could carefully scrutinize and prioritize public investment projects financed by development expenditure to avoid the “white-elephant” hypothesis. Additionally, Uganda’s economic growth can be enhanced through devising strategies that increase on gross fixed capital formation and strategies that enhance domestic tax revenue collection in order to cut on dent servicing.