The Association of Southeast Asian Nations (ASEAN) has faced a persistent fiscal deficit for the last three decades. In the vast literature, a question is still arising: is ASEAN’s fiscal deficit alarming? This study explores the fiscal deficit with different perspectives to provide guidelines for policymakers to answer this question. For this purpose, we offer fiscal causal hypotheses estimates, including the contribution of Government expenditures (GEs) and Government revenues (GRs) towards sustainable economic growth; we then evaluated two additional deficit hypotheses, the impact of fiscal deficit and deficit financing on inflation. This empirical analysis covered annual financial data for the years 1990 to 2019of ten member countries of ASEAN by applying panel econometric techniques, which include unit root Levin, Lin, and Chu (LLC) and Im, Pesaran, and Shin (IPS) tests; the panel autoregressive distributed lag (ARDL) model for cointegration; and the Dumitrescu–Hurlin (DH) test for causality. The findings revealed that government expenditures contribute more towards sustainable economic growth while government revenues are inversely related to growth in the long run. The DH causality test supported the fiscal synchronization hypothesis and current account targeting hypothesis in ASEAN. The interest rate is found as a moderator between fiscal and current account deficits. Furthermore, the findings showed that the fiscal deficit of ASEAN could generate inflation while relying on outstanding debt. Overall, our findings concluded that the fiscal deficit of ASEAN is alarming based on the behavior of government revenues, interest rate dynamics, political stability, and outstanding debt in deficit financing.

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Theoretically, fiscal deficit may be inflationary, but its sources of financing can bring change in significance and impact. Malaysia is facing a high tendency of fiscal deficit from the last decade. To finance the fiscal deficit, which sources are less inflationary in the country? To answer this question, the study aims to analyze the quarterly financial time-series data covering the period from 2000 Q1 to 2018 Q4 of Malaysia using recent econometric techniques. The analysis is carried out in three stages. In the first stage, it is tested that the fiscal deficit is inflationary along with the money supply. In the second stage, it is determined that political instability moderates the link between inflation and the fiscal deficit and the external sources of borrowing in the short-run, while the domestic sources of borrowing in the long run are found inflationary. In the third stage, the central bank borrowing and Bank institutions borrowing from the domestic sources and the short-term borrowing from the external sources are found less inflationary. The findings suggest that borrowing through the central bank and bank institutions (domestic sources) is less inflationary in the long term; while for a short-term policy, from external sources, only short-term borrowing is less inflationary; medium- and long-term borrowing are much more sensitive to inflation.