Government Expenditure and Regional Economic Growth: The Direction of Causality

This study examines the link between government expenditure and regional economic growth, over
the period 2013 to 2017. Gross County Product per capita growth is used as indicator of regional
economic growth. This study used Error Correction Model and Engle and Granger framework two
step procedure to investigate the long-run and short-run equilibrium relationship between
expenditure and regional growth. The analysis reveals that expenditure and regional growth are cointegrated
and, hence a long-run equilibrium relationship exist between them. Non-devolved
expenditure is found to be significant in determining regional growth and growth significantly affect
non-devolved in short-run. Further, short-run uni-directional causality was detected between capital,
recurrent expenditures and growth. This study argues that expansionary government expenditure
accelerates regional economic growth in long-run. The absence of a long-run causality moving from
growth to components of expenditure implies that economic growth macroeconomic policies can be
implemented without adversely affecting the size of government expenditure.