Abstract:
The hypotheses of Wagner and Keynesian put forward that economic growth and government expenditure are correlated. Nevertheless the two hypotheses differ in terms of direction of causality. The Keynesian hypothesis that government expenditure persuades economic growth in the long run has been tested and validated to demonstrate its justification; and this notion has become an accepted piece of evidence in the economics of public sector. Furthermore, theories emphasize that efficiency is significant when analyzing government expenditure and economic growth relationships. The aim of this research is to estimate the efficiency scores of federal and local governments in terms of public resource allocation. The research further aims at analyzing the effects of federal and local government expenditures and their efficiencies on the country’s economic growth. The study then uses annual panel data for 20 regions spanning from 1996 to 2014 and employed Im-Pesaran-Shin and Fisher ADF tests to conduct panel unit root tests. Empirical findings show that Tanzania’s economic growth and its explanatory variables are non-stationary at their levels and stationary at their first difference. The study further employs Pedroni test to conduct panel co integration tests and finds that variables in the model have long run association. This research employs Data Envelopment Analysis to construct efficiency scores of federal and local governments. Further, the research employs Keynesian hypothesis and modifies Barro’s growth model to analyse the effects of federal and local government expenditures and their efficiencies on the country’s economic growth. Generalized Methods of Moments is used to accomplish this analysis. Findings demonstrate that federal and local governments are less efficient in terms of public resource allocation, and it is revealed that federal government tends to misuse public resource more than local government. Findings show further that increasing federal and local government expenditures reduces economic growth. Furthermore it is revealed that federal government efficiency improves economic growth while local government efficiency reduces economic growth. Premised on these findings this research recommends the following; first federal and local government should minimize public resource allocation in order to improve their performance. Second, federal and local government should embark on reducing their spending in order to accelerate economic growth. Third, government should empower private sector and establish Public-Private-Partnership in order to perk-up the welfare of the growing population necessary for achieving Millennium Development Goals and National Development Vision 2025.
