Effect of government expenditure on private investment in Uganda (1974-2019)

Abstract

This study investigated the effect of government expenditure on private investment from 1974 to 2019. The main objective was to establish the effect of government expenditure on private investment in Uganda. The data used in the inquiry was extracted from World Bank data base. The main approach used was the Johansen and Juselius co-integration approach along with Vector Error Correction model. The vector autoregressive model (VAR) was modified into the vector error correction model (VEC) to cater for the variables that were stationary in their differences. The variables that were investigated in this study included private investment, agriculture expenditure, health expenditure, infrastructure expenditure and debt servicing expenditure. The empirical results showed that agriculture expenditure had a positive significant effect on private investment.1% increase in agriculture expenditure leads to 2.4% increase in private investment. Health expenditure also had a positive (3.8) and significant effect on private investment meaning that a 1% increase in health expenditure leads to 3.8% increases in private investment. Results from infrastructure indicated a positive significant effect of 2.6 on private investment implying that a 1% increase in infrastructure expenditure leads to 2.6% increases in private investment. Furthermore, debt servicing showed a 0.3 significant negative effect on private investment meaning that 1% increase in debt servicing leads to a 0.3% decrease in private investment. Granger Causality test showed that there was a long run relationship between government expenditure and private investment but there was no short run relationship at 5% level of significance. From the short-run model, the error correction term results showed adjustment toward equilibrium by about 0.1% within a year. Government should spend on agriculture expenditure that promotes area-based development ensuring that each area is prioritized through specific development programs .Government should subsidize agricultural inputs as well. Government should spend on utilities in health facilities, medicines and health supplies‚ salaries of health workers, on vaccination and immunization program and payments for health facility operational and administrative costs. Government should try to maintain interest rates at low levels in order to stimulate the economy as it services the debt. Lower interest rates make it easier for individuals and businesses to borrow money. In turn, those borrowers spend that money on goods and services which enhances private investment.