Economic, Political, and Institutional Determinants of Budget Deficit: A Dynamic Panel Data Approach to South Asian Countries

Abstract

The study conducted on South Asian countries spanning from 1995 to 2023 using the pooled mean group (PMG) and mean group (MG) approaches for the dynamic panel data has yielded insightful findings regarding the long-run relationships between economic, political, and institutional determinants of the budget deficit. Through empirical analysis, the study confirmed the presence of these relationships, highlighting key factors that significantly impact budget deficits. Specifically, inflation, debt servicing, slow economic acceleration, and large government size were identified as major determinants of budget deficits in the region. Interestingly, the study also incorporated a dummy variable for elections, revealing a positive relationship between election years and budget deficits. This suggests that governments may increase spending during election years to gain political support, leading to higher deficits. These findings provide valuable insights for policymakers, emphasizing the importance of addressing these factors to achieve fiscal sustainability and economic stability in South Asian countries.