Budget deficit and growth: in search of ceiling for Bangladesh

Abstract

The impact of fiscal deficit measured by deficit in national budget on the growth of respective economy has been a widely researched area with plenty of debatable results. Shedding light in search of the optimum level of budget deficit, the current paper tried to contribute to the field of literature on this issue which is perhaps inadequate as far as Bangladesh economy is concerned. A total of 40 years of time series data spanning form 1975-76 to 2014-15 has been employed. Identification of integration order of the variables was examined performing Augmented Dickey Fuller (ADF), Phillips-Perron (PP) and Kwiatkowski-Phillips-Schmidt-Shin (KPSS) tests. Establishing the existence of cointegration among variables following the Johansen's procedure, long run cointegrating vector has been estimated depending on VECM. The threshold has been identified solving the estimated long run cointegrating relationship for a local maximum. Findings can be summarized by saying that the long run impact of budget deficit on growth would remain positive; nevertheless, there would be no short run adjustment. Depending on the model definition and the particular exogenous variable(s), the threshold budget deficit has been measured to range between 4.55 to 5.0 percent of GDP.

Does Budget Deficit Impede Economic Growth? Evidence from Bangladesh

“…However, GCF is found insignificant in Both Model 1 and Model 2. The outcomes of this study are consistent with prior studies (Abdullah et al 2018;Hussain & Haque 2017;Majumder 2007) which have also revealed the positive impact of budget deficit and government total expenditure on economic growth.…”

“…A number of researches have been carried out on the relationship between budget deficit and economic growth but very few of that in Bangladesh. (see Hussain and Haque 2017;Majumder 2007;Haider et al 2016;Hassan and Akhter 2014;Abdullah et al 2018). Among them in Bangladesh, however, the author has not found any of the studies used autoregressive distributed lag (ARDL) model which is, by and large, a very sophisticated and privileged econometric technique for empirical investigation over other cointegration techniques.…”

“…Therefore, extensive empirical studies have been conducted to investigate the relationship between budget deficit and economic growth all over the world but very few in Bangladesh. (see, for example, Van & Sudhipongpracha 2015;Abdullah et al 2018;Hussain & Haque 2017;Barro 1991;Ahmed and Miller 2000;) In recent time, Qimiao Fan, World Bank country director for Bangladesh, Bhutan, and Nepal said that Bangladesh has become one of the 10 fastest growing economies owing to success of its efforts in reducing poverty and developing human capital 1 . According to World Bank statement on Bangladesh economy-"Progress was underpinned by 6 percent plus growth over the decade and reaching to 7.9 percent in 2017/2018, according to official estimates" 2 .…”

The Assessment of Fiscal Deficit on Economic Growth in Transition Countries of South-Eastern Europe

“…Furthermore, there is evidence of gaining growth to reduce deficits at this level and the effects disappear within a fiscal regulation. Abdullah et al (2018), including 40 years of time series data covering the period from 1975-1976 to 2014-2015, have examined the impact of the fiscal deficit on economic growth. The findings showed that the fiscal deficit would have a positive impact on economic growth as long as it is considered long-term, and since the error correction terms were insignificant, it is argued that the short-term dynamics between the fiscal deficit and economic growth for the Bangladeshi economy are missing.…”

Analysis of Trend and Sources of Government Budget Deficit Financing in Bangladesh

“…But reducing budget deficits is a dynamic mechanism that relies on a wide range of economic activities including external factors. Various studies (Abdullah, Azad, & Siddiqua, 2018;Ahmad, 2018;Biplob, 2019;Hussain & Haque, 2017;Rana & Wahid, 2016) have been conducted on-budget deficit in Bangladesh. These studies were done with the budget deficit and economic growth in Bangladesh.…”