Expenditure on Education, Capital Formation and Economic Growth in Tanzania

Purpose: Capital formation and Government spending on education has been examined to establish their relationships and how they impact the economic growth of Tanzania. Gross domestic products were used to measure economic growth while government spending on education and capital formation were used as independent (explanatory) variables. Design/Methodology/Approach: Time series research design was adopted to analyse data extracted from world development indicator-database, data ranging from the year 1990 to 2020 were used. Before testing, econometric estimates data were subjected to normality, multicollinearity and stationarity test. The study used Johansen co integration to determine existence of co-integrating equations. Findings: Findings of this study revealed no long-run causal relationship among the variables since Johansen co-integration test shows no co integrating equations among the variables. Findings from VAR revealed that Tanzania's economic performance in one previous year have a major positive effect on current performance. While the past year's economic performance and capital accumulated in previous years do not have any significant impact on government spending on education in the short run. Capital accumulated one year ago has a significant influence on the status of current economic performance. Research Limitation/Implications: The study could give more meaningful results if the human development index (HDI) was used rather than using the gross domestic product (GDP) as the dependent variable. HDI captures key aspects that measure social services such as health and education. The study could also employ independent variables such as the number of enrollment in a primary as well as secondary schools as well as the number of graduates at tertiary and higher learning institutions to see the output of the spending on education in terms of the skilled labour force. Practical implications: Results would be useful when it comes to the implementation of education policy (ministry of education) while keeping the view that economic performance during one previous year has a significant positive influence on current performance. While the past year's economic performance and capital accumulated in previous years do not have any significant impact on government spending on education in the short run. Originality: Previous similar studies have not used capital formation as one of the independent variables in such studies in the Tanzania context. Wider understanding of the existing relationship between spending on education and growth is derived from the fact that the previous year’s economic performance and capital formation do not have any impact on current government spending on education.