EXPLORING THE IMPACT OF AID AND BORROWING ON FISCAL POLICY IN GHANA

Abstract

Fiscal management is crucial for economic growth and development, particularly in developing countries where fiscal policy has a significant impact on their economic prospects. This study investigates the effects of government borrowing modes on government spending and revenue mobilization behavior in Ghana. We propose that the effects of borrowing modes on revenue streams may not be uniform. The study modifies the Franco-Rodriguez government utility maximization function and employs the vector autoregressive (VAR) system to establish dynamic links among borrowing modes, revenue channels, and government spending. The study analyzes two variants of the model, aggregated and disaggregated government expenditure models. The results indicate that there is one long-run equilibrium relationship 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 estimates show that government consumption expenditure is inversely related to government capital expenditure, direct taxes, indirect taxes, and domestic borrowing. In the short run, the impacts of borrowing modes on tax channels are different, and tax policy initiators should consider these differences while formulating policies. Our findings have implications for policymakers, particularly in developing countries, regarding the management of fiscal policies and the effects of borrowing on government spending and revenue mobilization. Keywords: Fiscal behavior, government borrowing, revenue mobilization, Ghana, vector autoregressive system, Franco-Rodriguez function