Public Debt and Economic Growth: A Threshold Determination in Ghana

This study examines the existence of a debt Laffer-curve effect on economic growth in Ghana by investigating the non-linear relationship between public debt and economic growth. Specifically, the study seeks to determine the threshold level beyond which increases in public debt begin to exert a negative effect on economic growth. Using annual time series data spanning the period 1965 – 2018, the study employs the Autoregressive Distributed Lag (ARDL) modelling approach with a quadratic debt term to capture the potential non-linear dynamics between public debt and growth. The empirical findings reveal the presence of an inverted U-shaped relationship between public debt and economic growth, confirming the existence of a non-monotonic effect of debt on growth in Ghana. The results further indicate that the optimal public debt threshold is approximately 52.4 percent of GDP. Beyond this threshold, additional increases in public debt adversely affect economic growth, raising concerns about debt sustainability and long-term macroeconomic stability in Ghana. The findings suggest that Ghana’s current public debt levels may not support sustained long-term economic growth. Consequently, the study recommends that policymakers maintain the public debt-to-GDP ratio below the estimated threshold to promote macroeconomic stability and achieve sustainable economic growth.