Is the Fiscal Deficit of ASEAN Alarming? Evidence from Fiscal Deficit Consequences and Contribution towards Sustainable Economic Growth

Maran Marimuthu,Romana Bangash,Hanana Khan

doi:10.3390/su131810045

Abstract

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 2019 of 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.

Highlights

Introduction published maps and institutional affilCrisis (AFC’97) and the Global Financial Crisis (GFC’07)
After panel Auto-Regressive Distributed Lag (ARDL), this study utilized the DH granger causality test in two stages, the first stage is for the fiscal causal relationship and the second stage is for twin deficit hypotheses
We present the panel ARDL findings for the three stages, i.e., the first stage of panel ARDL is about fiscal causal hypotheses, the second stage of panel ARDL is about twin deficit hypotheses, and the third stage is about the fiscal deficit, deficit financing, and inflation

Summary

Introduction

Crisis (AFC’97) and the Global Financial Crisis (GFC’07). The recent academic pendulum is swinging towards the consolidation of the fiscal deficit. The post-crisis experiences and recent economic research address the importance and effectiveness of fiscal balance as a tool for the long-term and short-term impacts of financial decisions and economic policies. Economists and researchers have reported their findings on ASEAN’s economy, provided suggestions, and created policy guidelines [1,2,3,4,5,6]. I.e., government expenditures, government revenues, and deficit financing—play an essential role in the fiscal policy of ASEAN. For the last two decades, government expenditure (GE) contributions to the GDP have been stable in Southeast Asian nations. Some members of ASEAN have faced notable changes in GE from 2006 to 2016.

Objectives

Methods

Results

Conclusion