Budget Deficit and Economic Growth in Sub-Saharan Africa: A PMG Approach

Abstract

The relationship between budget deficit and economic growth remains one of the widely debated topics among policy makers and economists in both developed and developing countries of the world. This paper empirically investigated the long run and short run relationship between budget deficit and economic growth in sub-Saharan Africa countries from 1991 to 2018 using Panel data for twenty (20) sub-Saharan Africa Countries. The estimation technique employed in the study was the Pooled Mean Group (PMG) estimation method and the regression results revealed that in the long run, budget deficit has a negative and significant relationship with economic growth whereas in the short run, it has a positive and significant relationship with economic growth. The study concluded that government should reduce the overall recurrent expenditure as it will help to mitigate the problem of budget deficit that leads to debt accumulation in sub-Saharan Africa countries and increase expenditure on developmental projects.

On the fiscal deficit and economic growth in sub-Saharan Africa: A new evidence from system GMM

“…This implies that fiscal deficit enhances growth in the short run as countries finance their budget through deficit financing. The result of our study is consistent with the findings of [ 18 , 40 ].…”

“…This shows that investment in fixed capital formation creates a conducive environment for the economic growth of SSA in the short run. The work is consistent with the findings of [ 18 , 62 , 67 ].…”

“…Contrary to this, other literature supports that the relationship between fiscal deficit and economic growth is based on the short and the long run. For illustration, [ 18 ] Examined the relationship between budget deficit and economic growth in SSA countries for the period of 1991–2018. Their study found that the impact of budget deficit is different in the long and short run.…”

“…The main focus of their study was to understand the role of fiscal deficit on the capitalization of the market. Another study by [ 18 ] investigated the effect of budget deficits on the economic growth of SSA using the pool mean group estimation. Their study found that fiscal deficit positively affects the economic growth of SSA countries.…”

“…Notwithstanding the aforementioned earlier studies, it was unclear how the fiscal imbalance affected economic growth. Furthermore, to the best of our knowledge, the current relationship between fiscal deficits and economic growth has not been properly researched, except for the study of [ 18 ], who looked directly at the impact of fiscal deficit in SSA nations. The purpose of this study is to present fresh evidence by utilizing system GMM and updated data to capture the recent association between fiscal deficit and economic growth in SSA.…”