Government Expenditure and Economic Growth in Nepal: Sectoral Analysis Using the Vector Error Correlation Model Approach

Abstract

The study examines how government spending affects Nepal’s economic growth through its two main components: social services and economic development. The research uses historical data that covers the period from 1974/75 to 2022/23. It used time-series econometric methods to study how government spending impacts economic growth, including Unit Root, Johansen Cointegration, Vector Error Correction Model and Granger causality test. The study results show that government spending has increased consistently throughout the research period in both sectors studied. Government spending shows a permanent relationship with real gross domestic product at factor cost (RGDPfc), while its short-term impact remains statistically insignificant. The social service sector shows a significant adjustment rate, which leads to its equilibrium state. The relationship between government spending and expenditure shows bidirectional causality. The relationship between electricity, drinking water expenditure and economic growth shows unidirectional causality according to the research. The relationship between spending on agriculture, communication, irrigation, education and local development and RGDPfc shows unidirectional causality, according to the research. The findings demonstrate how government resources should be distributed across various sectors to achieve sustainable economic growth. Attaining sustainable economic growth in Nepal requires efficient sectoral distribution of government spending. The study highlights the need for agricultural financial backing, water development, communication services and electricity supply because these sectors drive sustainable economic growth. The study offers valuable findings, but its use of historical data restricts its findings because this data cannot show modern policy changes. Future research may include fiscal policy reforms, and external economic shocks.