GROWING PUBLIC EXPENDITURE AND REVENUE: THE IMPACT OF FISCAL DEFICITS ON ECONOMIC GROWTH OF ETHIOPIA

This study aims at verifying the long run relationship between public expenditure and revenue and to assess the impact of the fiscal deficits on economic growth of Ethiopia. To this end an asymmetric cointegration test based on NARDL and an endogenous growth model have been used for the period starting from 1974 to 2016. Toda-Yamamoto test has been employed to verify the causality among the variables. The findings suggest long run cointegration between expenditure and revenue; and causality test confirming fiscal synchronization hypothesis for Ethiopia. The evidence supports long run and short run asymmetric relationship between real total government expenditure and real total revenue. The endogenous growth model estimates reveal that, a positive shock in fiscal deficit leads to positive change in GDP and when there is a negative shock, it reduces GDP. There is bi-directional causality running between GDP, human Capital and labour force. However, there is a unidirectional causality running from fiscal deficits to economic growth. In view of these findings the policy measures such as improving tax revenues and minimizing fiscal deficits have been suggested