Abstract:
This study investigates the causes of changes in public expenditure as well as its role in the economic growth of Ethiopia. In order to achieve the stated objectives, i.e., the determinants of public expenditure and their role for economic growth, both descriptive analysis and econometric analysis with the help of two separate models were estimated using cointegrated VAR approach for the period 1960/61-2014/15. The result reveals that foreign debt has a significant impact on total government expenditure both in the long run and short run. Whereas, foreign aid is positively but insignificantly impacted total government expenditure in the long run. The insignificant effect of foreign aid to public expenditure might be because of the non-smooth flow of foreign aid or the crowding effect of grants to domestic saving and taxation. Moreover, the study shows government consumption expenditure exerts negative and significant effect on RGDP both in the long run and in the short run. On the other hand, the contribution of human capital investment to growth is positive and significant in long run but negative and significant in the short run which is consistent with the endogenous growth theories. From the financial source components, domestic borrowing and tax revenue has positive and significant impact on RGDP in Ethiopia, in the long-run, but positive and significant and negative and insignificant, in the short-run, respectively. Contrary to this, the contribution of foreign debt to growth is negative and insignificant in the long run and negative and significant in the short run. On the other hand, foreign aid has a positive but insignificant effect on real income in the long run and negative and significant effect in the short run. The study implies that beyond the composition of government expenditure, means of finances are also areas of concerns for the government since they matters for economic growth.
