Public Debt and Budget Deficit: Gauging the Impact on Malaysia’s Economic Performance

Zuriyati Ahmad,Rosman Mahmood,Ahmad Syakir Ammar Ahmad O’Llia

doi:10.6007/ijarbss/v11-i18/11433

Abstract

Malaysia has been experiencing large budget deficits financed by increasing debts throughout the years especially after the Asian Financial Crisis. Many studies have highlighted that the persistent increases in the budget deficit and large debt are the paramount issues that might drag the economy in the country. This study is therefore attempting to gauge the impact of the budget deficit and public debt on Malaysia’s economic performance. Johansen cointegration method is utilized in this study as longer period of observation is used. The quarterly data spanning from 1998 to 2016 is tested using this method. Finding reveals that budget deficit has negative impact on the economic performance however it has insignificant influence in the long run equilibrium. While the public debt is divided into two components namely domestic debt and external debt. Both debts are found to have positive and significant impact on economic performance in the long run equilibrium approach. This implies that against previous researches, public debt either domestic or external debt can spur the economic performance for the country through the expenditure that lead to the economic development in the long run equilibrium.

Highlights

In most of the countries in the world there are two paramount macroeconomic issues that have been highlighted; the persistent of budget deficit and the government debt
Analysis and Discussion As stated earlier in order to test using the cointegration method it is necessary to conduct Augmented Dickey-Fuller (ADF) test in order to check whether the series of the data is stationary or non-stationary
This study suggests if there is a shock in the Malaysian economy, the variable that can help to converge the economy to its equilibrium is the changes in economic performance is through government debt that been spent productive expenditures

Summary

Introduction

In most of the countries in the world there are two paramount macroeconomic issues that have been highlighted; the persistent of budget deficit and the government debt. Budget deficit and public debt and are interrelated as they affect each other. The persistent of budget deficit will lead to the instability to any countries. Theory suggests that persistent and large deficits lead to a harmful effect on major macroeconomic fundamental. Public debt for example plays important role in the economic development process. Its impact on economic growth and performance incessantly leads argument between researchers and policy makers and due to its inconclusive results. The Keynesian model for example argues that no real burden is associated with public debt and that has no significant impact on economic growth (Metwally & Tamaschke, 1994). While Vo et al (2020) stated that the real burden happens at the time government spending is made when real resources are used up

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