Long-Run and Short-Run Causality between Government Tax Revenue and Economic Growth in Ghana

Abstract

The study investigates the causal flow between government tax revenue and economic growth in Ghana using time series data from 1970-2021. The study employs the Auto-Regressive Distributed Lag (ARDL) bounds test approach and Granger Causality test to investigate the long run and short run relationship between government tax revenue and economic growth. Findings of this study indicated that there is significant correlation between total tax revenue and economic growth with 87% speed of adjustment in the short run towards equilibrium level in the long run. Empirically, the analysis also indicates the evidence of long run equilibrium correlation. Thus, the Granger Causality test indicated positive and statistically significant unidirectional causal flow from tax revenue to economic growth. Based on the findings, the policy makers should consider the tax revenue-led growth policies for effective formulation and implementation to enhance the nature of the Ghanaian economy. Hence, to curb the persistent budget deficit, the outlook is that policymakers should employ efficient, ideal and buoyant tax system which would then bring substantial increase in gross tax revenue of the government leading to optimum mobilization of resources for higher economic growth in Ghana. This can only be sustained via efficient allocation of the tax revenue collected to productive sectors and similarly using the distributive principle through societal welfare maximization. Efficient tax regulation system has to be adopted to mitigate the issue of tax evasion, especially among firms and corporate entities. Also, tax rates should be frequently revised to avoid discouraging investments.