Budget Deficit Financing Research Articles

Debt sustainability analysis and its policy implications for Ukraine

Since the outbreak of the russian invasion in 2022, Ukraine’s public debt has risen sharply, and debt sustainability turned out to be a matter of concern. This study aims to conduct a comprehensive debt sustainability analysis (DSA) for Ukraine, focusing on probabilistic judgments about the trajectory of public debt, the government’s gross financing needs in the 2025–2028 period, and essential policy measures to prevent an unsustainable debt situation. The DSA incorporates references to quantitative debt-related benchmarks and assessments of performing a debt treatment and changing the structure of budget deficit financing. Four medium-term scenarios are run: a baseline scenario, a negative scenario, a positive macro-scenario, and a policy shock scenario. The first three scenarios yield public debt stocks from 94.8% to 128.8% of GDP in 2028, above the intermediate threshold of 82% and far above the final threshold of 65%. Even under the baseline projections, public debt trajectory and gross financing needs magnitudes deviate considerably from the benchmark levels. Only the policy shock scenario is compatible with ensuring public debt sustainability, being conditional on a substantial extension of foreign grants, and applying a significant haircut through the second debt restructuring. The results suggest that avoiding public debt crisis while meeting recovery and reconstruction needs would require raising the share of grants up to around 45% in the structure of foreign official financing and debt reduction by at least 50% in the framework of new foreign debt restructuring, covering official bilateral debt and euro-bonds’ debt. Acknowledgment This study is published as an output of the EURIZON project “Ukraine’s Foreign Financing Needs and the EU’s Role in Restoring External Sustainability and Long-Term Growth of the Ukrainian Economy,” which is funded by the European Union’s Horizon 2020 Research and Innovation Programme under grant agreement No. 871072.

Normative Content and Practice of Application of the Principle of General (Aggregate) Cost Coverage in the Budget System of the Russian Federation

The paper presents a comprehensive study of the importance of the principle of general (aggregate) cost coverage for the formation of the Russian budget system, formation of budget and tax legislation, implementation of modern budget policy and development of law enforcement practice. Special attention is paid not only to the doctrinal and theoretical understanding of this principle, but also to the systematization and research of various introduced practices of linking budget expenditures with specific sources of revenues (primarily mandatory public payments) or financing budget deficits. The paper presents various legislative proposals for the introduction of exceptions to the prohibition of linking budget expenditures and certain budget revenues, which were rejected due to their contradiction to the principle of total (aggregate) cost coverage. The study allowed the author to make proposals based on the constitutional principle of mutual trust between the State and society. By introducing a mandatory public payment, the payment of which is conditioned by the purpose of carrying out special expenses of public authorities, the state must create a guaranteed target mechanism for financing such expenses using special mechanisms for accumulating budget revenues.

Effects of Budget Deficit Financing on the Economy of Nigeria

The study investigated the effects of deficit financing on the Nigerian economy using data that covered 41 years (1981 to 2021). Real gross domestic product (RGDP) was the dependent variable, while government budget deficit financing disaggregated into different sources of budget deficit financing represented the explanatory variables. The ordinary least squares (OLS) regression method was used for the tests and analyses. Results established that both non-bank public sources of deficit financing and banking system sources of deficit financing had positive and significant effects on growth. However, non-bank public deficit financing positively led the Nigerian economy and was followed by banking system deficit financing. Both ways and means and external deficit financing sources were negative and insignificant in influencing the Nigerian economy. Ways and means were third while external deficit financing was fourth in descending order of influence on RGDP growth. The study further applied the Augmented Dickey-Fuller (ADF) approach to unit root tests and observed that the variables were integrated at both levels and first difference, leading to the application of the Autoregressive Distributed lag (ARDL) approach to data estimation. The ARDL bounds tests showed that the model specified for the study followed a long-run path and that a long-run relationship existed between the dependent variable and the explanatory variables. The estimation of the long-run and error correction estimation indicated that the independent variables had a time-varying effect on the real gross domestic product of Nigeria. That ARDL estimation of the error correction mechanism also showed that RGDP adjusted rapidly to short-run discrepancies in the long run. Finally, the error correction mechanism showed that external sources of budget deficit financing, non-banking system public deficit financing, ways and means source of deficit financing, gross capital formation, real interest rate and exchange rate, all had robust effects on growth, though with varying directions of influence. Based on the foregoing, the study has recommended deficit financing, more especially non-bank public deficit financing and banking system deficit financing as better options for attaining the much desired rapid and sustainable economic growth of Nigeria as they have been proven to be non-inflationary in practice compared to ways and means and external source of deficit financing over the years.

The Effects of Government Borrowing to Investment Growth of the Country

Government borrowing has emerged as one significant method that helps in mobilization of resources for economic growth especially in emerging economics. Most governments in developing economies resort to borrowing as a way of financing budget deficit. This paper identifies the effects of government borrowing to investment growth in the Philippines. Specifically, it presented the trend of gross domestic product, internal debt, and external debt from 1990-2020. The study used Johansen Co-integration, Granger Causality, and Vector Autoregression (VAR) models to analyze this study. Johansen’s Co-integration analysis revealed that the gross domestic product (GDP), internal debt (ID), and external debt (ED) are rejected at a 5% significant level and showing that all relevant variables have a long-term relationship and the data are co-integrated. On the other hand, unrestricted VAR model, there exist a relationship between gross domestic product (GDP), internal debt (ID), and external debt (ED). The Granger Causality test result revealed the direction of the causal relationship between independent and dependent variables; gross domestic product, internal debt, and external debt at the 5% significant level.

Budget Deficit Financing and Economic Well-Being in Benin: Testing the Ricardian Equivalence Theory

This article examines the validity of Ricardian equivalence theory in Benin over the period 1980 to 2020. The study uses a time series with the Autoregressive Long-Lived Regressions (ARDL) model. The results show that budget deficit financing has a positive effect on household consumption in the short term, and a negative effect in the long term. On the other hand, budget deficit financing has a positive effect on gross domestic product in the short term and no significant effect in the long term. These results suggest that budget deficit financing has different short- and long-term effects on economic well-being in Benin. Consequently, policymakers should consider complementary strategies to support long-term economic growth and ensure the sustainability of fiscal policies.

Budget Deficit Financing and Macroeconomic Outcomes: New Evidence from a VARX Model for the Iranian Economy

The main goal of the study is to evaluate the impacts of different government deficit financing strategies on GDP growth and inflation in the oil-rich nation of Iran from 1990:1 to 2018:4. The link between the government’s budget deficit and GDP growth is examined using the Explanatory-Augmented Vector Autoregressive (VARX) model. Because of the presence of unmodelled variables in the research, the VARX model was applied. The results of the study indicate that the way that the government finances the budget deficit had a direct impact on GDP growth, such that when the Foreign Exchange Reserve Account (FERA) is for most of the financing, the budget deficit’s impact on GDP growth is positive and its severity is increasing. Although the government’s budget deficit has a positive impact on GDP growth, it becomes less severe when most of the financing is obtained through the Selling Government-Owned Companies (SGOC), and when the sale of Debt Securities (DS) is for most of the financing, the impact of the government’s deficit on GDP growth is positive. The study concludes that there is an insignificant effect of a government’s budget deficit on inflation when most of the deficit is covered by withdrawals from the foreign exchange reserve account. However, the budget deficit has raised inflation when the two other sources of funding have gotten most of the funding. One of the study’s innovations is its investigation of the ways used to finance the government’s budget deficit in oil economies, especially Iran. The use of a VARX model to analyse the impact of the government’s budget deficit on macroeconomic indicators and the severity of that impact is another novel aspect of this research. In the Iranian economy, there is no proper statistical information available about the spending of the budget deficit (especially after 2009). This article concludes with a clear message to policymakers: if the government tends to reduce the share of oil income in financing the budget deficit, increasing the share of debt securities is the best alternative.

Enabling beneficial right for sovereign ṣukūk issuance in Indonesia: challenges and analysis

PurposeThis study aims to investigate beneficial right as a new legal concept and term accepted by the Indonesian legal system. The new concept was ratified to endorse government decision to use ṣukūk (as an Islamic financial instrument) in the financing of state budget deficit. Some legal issues emerged after the ratification such as the necessity to synchronize the beneficial right with other property rights in Indonesia and the disharmony between laws related to sovereign ṣukūk issuance.Design/methodology/approachThe study uses a qualitative method with library study and interviews with relevant legal experts in Indonesia as the data collection techniques.FindingsThe findings show that the passage of Sovereign Ṣukūk Law 2008 that ratified beneficial right deemed as a concession point by the government to solve conflicts between legal restriction and employment of state-owned assets as the underlying asset of sovereign ṣukūk. The study deemed the necessity to improve the use of beneficial right in the Indonesian legal system which by the concept is not exercised for the issuance of sovereign ṣukūk only. There is the need to harmonize the administration of this right with other property rights in Indonesia.Research limitations/implicationsThe scope of study will be limited to the Indonesian regulation related to the use of beneficial right concept in the issuance of sovereign ṣukūk in Indonesia. The regulation as mentioned will be in the form of statutes, presidential or ministerial regulations, and also opinions of Indonesian legal and sharīʿah scholars regarding the matter.Originality/valueThis study may explore significantly the use of beneficial right for the issuance of sovereign ṣukūk by the Government of Indonesia. Specifically, the study reveals and addresses the issues that are following the ratification of beneficial rights originated from the common law system into the Indonesian civil law system.

Deficit financing and Economic Growth: Evidence from Sub-Sahara African Countries

In view of the growing controversy on financing of budget deficits, this study investigates the implications of deficit financing in the Sub-Sahara African countries and how it has impacted on their growth rate. Specifically, it looked at how domestic debt, external debt, external reserves, and budget deficit affects real gross domestic product (RGDP). The study utilized panel data gotten from the statistics databank of the various Central Banks in the Sub-Sahara region and the development indicators of the World Bank for period 1986 - 2021; thus, giving a total observation of 144. The Hausman statistics gave the panel fixed effect regression technique as the most appropriate analytical method, which revealed short run relationship at the 5% significant level. From the result of the study, both external reserves and domestic debt are positive and significant to gross domestic product; external debt is negative and insignificant to gross domestic product; while budget deficit is negative and insignificant to gross domestic product. In conclusion, deficit financing affects the growth rate of most Sub-Sahara African economies. The study recommends among others that both fiscal and monetary agencies of the Sub-Sahara countries should maintain optimum level of domestic debt as it is one of the mechanisms for economic growth. Also, is the enforcement of economic policies to aid increase in external reserves.

Бюджетные кредиты как инструмент обеспечения устойчивости региональных бюджетов для успешной реализации национальных проектов

The subject of the study is budget loans, the importance of which has increased significantly in ensuring the balance of the budgets of the subjects of the Russian Federation. Activation of the processes of budget lending to regions is one of the main directions of the state program of the Russian Federation "Development of federal relations and creation of conditions for effective and responsible management of regional and municipal finances", on the effectiveness of which the prospects for ensuring the sustainability of the budgets of the subjects of the Russian Federation and stimulating the infrastructural development of the regions depend. The purpose of the work is to assess the current mechanism for providing budget loans to the subjects of the Russian Federation in order to establish the prospects of its impact on the budgetary stability of the regions. The study highlights the main trends in budget lending to the subjects of the Russian Federation, including active restructuring of debt on debt obligations of the subjects of the Russian Federation in favor of treasury and other budget loans, as well as reducing the scale of market repayable financing of budget deficits of the subjects of the Russian Federation; reducing the cost of borrowing and, accordingly, budget expenditures for servicing the public debt of the subjects of the Russian Federation; optimization parameters of the regions' debt burden; transformation of approaches to balancing regional budgets in favor of inter-budgetary redistribution of funds, as well as attraction of temporarily free funds of state institutions and balances of funds on budget accounts.

A monetary Keynesian view of modern monetary theory

Both monetary Keynesian theory and modern monetary theory (MMT) place money at the center of the analysis and highlight the important economic role of the state in a monetary market economy in which full employment is neither the norm nor the center of gravity. Whereas monetary Keynesian theory implies that economic policy is considerably constrained by market forces, MMT considers economic policy to be all-powerful and able to ensure full employment. Polarizing MMT policy conclusions such as the proposition that modern states have no budget constraint result from MMT-ers’ neglect of crucial elements of the Keynesian framework. As Hajo Riese tirelessly argued, monetary financing of budget deficits has limits even in the presence of unemployment because the stability of a monetary market economy hinges on the scarcity of its money.

Impact of Budget Deficit Financing on Money Supply in Nigeria

This study empirically investigated the impact of budget deficit financing on money supply in Nigeria. The study is modeled using a framework of Keynesian theory of budget deficit financing and Richadian Equivalent hypothesis. Due to the homogeneity of macroeconomic variables, it adopted a vector error correction mechanism (VECM) which shows the existence of long run relationship between money supply and indicators of financing budget deficit. The general findings revealed that external source of financing budget deficit; internal source of financing budget deficit as well as debt servicing has a significant effect on money supply for the period under review in the Nigerian context. Base on these findings, the study recommended that external and internal source of financing budget deficit should be encouraged for effective and increased economic stability in Nigeria and not for political reasons. It should be properly channeled to productive sector of the economy that enhances economic stability.

Implications of Public Sector Budget Deficit Financing On Economic Growth in Nigeria: 2003-2018

This term paper titled: “Implications of public sector budget deficit financing on Economic growth in Nigeria” was carried out with the intention of ascertaining which financial options out of many financial alternative is the best for the Nigerian government. The research work gave considerations to the cost and risk associated to each finance option over the period 2003-2018. After review of several literatures and appropriate theories, the empirical analysis was carried out. The work employed regression analysis using log-linear of real GDP as the dependent variable and explanatory variables (Bank credit to government- BCG, Non-bank public credit - NBP, ways and means - WM, and external deficit financing - EXDF). The result revealed that budget financing through bank credit and Non-bank public are positively proportional to the growth rate of Nigerian economy. It further showed that financing through ways and means is inversely related to real GDP growth. The result for external financing exhibited inverse relationship with the growth rate of Nigerian economy but the coefficient of EXDF was not statistically significant. It was recommended that government should weigh the risks associated with external borrowing as well as consider the medium and long term repercussions of a possible default on debt servicing

IMPLICATIONS OF PUBLIC SECTOR BUDGET DEFICIT FINANCING ON ECONOMIC GROWTH IN NIGERIA: 2003-2018

This term paper titled: “Implications of public sector budget deficit financing on Economic growth in Nigeria” was carried out with the intention of ascertaining which financial options out of many financial alternative is the best for the Nigerian government. The research work gave considerations to the cost and risk associated to each finance option over the period 2003-2018.After review of several literatures and appropriate theories, the empirical analysis was carried out. The work employed regression analysis using log-linear of real GDP as the dependent variable and explanatory variables (Bank credit to government- BCG, Non-bank public credit - NBP, ways and means - WM, and external deficit financing - EXDF). The result revealed that budget financing through bank credit and Non-bank public are positively proportional to the growth rate of Nigerian economy. It further showed that financing through ways and means is inversely related to real GDP growth. The result for external financing exhibited inverse relationship with the growth rate of Nigerian economy but the coefficient of EXDF was not statistically significant. It was recommended that government should weigh the risks associated with external borrowing as well as consider the medium and long-term repercussions of a possible default on debt servicing.

ВИКОРИСТАННЯ РИНКОВИХ ДЖЕРЕЛ ФІНАНСУВАННЯ ДЕФІЦИТУ ДЕРЖАВНОГО БЮДЖЕТУ В УКРАЇНІ

Adopting a budget with a deficit in the modern world is not considered a negative phenomenon. However, it is imperative to identify sources of funding for such a deficit. In this regard, the use of market sources of financing the state budget deficit is the most optimal. The purpose of the article is to reveal the theoretical provisions and practice of financing the state budget deficit of Ukraine with the help of market sources. The article solves the following tasks: determining the place of financing the budget deficit in the process of equalization using different sources; characterization of existing sources of financing the budget deficit, and establishing criteria for classifying them as "market"; analysis of statistics on the preconditions for the state budget deficit in Ukraine; assessment of the use of market sources of financing the state budget deficit of Ukraine and the consequences of such financing. The existing sources of financing the state budget deficit are considered, among which: deficit financing emission, tax sources, budget sequestration, sale of budget assets, internal state loans, external state loans, free assistance. Market features identify the sources related to the use of debt financing instruments of the budget deficit, namely internal and external government loans. The advantages of using market sources of financing the state budget deficit are determined, namely: non-inflationary nature, efficiency of coverage, possibility to choose the most optimal offers on the market, wide opportunities for diversification, large base of risk reduction mechanisms, high liquidity. An assessment of the market sources use in terms of the state budget deficit financing in Ukraine allowed us to establish that external financing, which carries the greatest burden on the budget, accounts for the majority. In the structure of external financing, the largest share belongs to loans received by Ukraine from international financial institutions. Sold foreign government bonds also account for a large share of external debt. The domestic market for deficit financing is realized through the sale of domestic bonds. The increase in domestic and external debts poses a threat to Ukraine's debt security, which was analyzed using a number of indicators.

Structural Changes in U.S. Economy: 2010 – 2020

This article covers the major trends of structural changes in US economy during 2010–2020. Statistical analysis shows that mining industries and agriculture have very insignificant effects on US gross domestic product. Meanwhile liquid natural gas (LNG) and agricultural products are important articles of American export. Traditional manufacturing corporations are also decreasing their effects on American economy. Modern services are considered to be the most prospective for economic development and they add the largest value to US gross domestic product. Financial services, insurance and real estate trade demonstrate very high productivity of labor. Informational, professional and business services are also important for U.S. economy. And these branches have outstanding export potential. In the Section 2 the major problems of labor market are being analyzed. The author proves that majority of American employees is being engaged in service industries. Growing unemployment is considered to be the most serious problem of labor market. In the Section 3 structural changes in the sector of government finance are being researched. The structure of federal budget was stable enough during the period of 2010–2020. Military expenses share of budget expenses is decreasing, but social and health care expenditures are very high. The current operating role of the Federal Reserve in budget deficit financing is being analyzed. The author proves that FRS and foreign sponsors of American debt give up their place to American private investors. In the long run this situation may create serious problems for federal debt financing. As a result, U.S. dollar position as an international reserve currency may be weakened. Dollar share in international trade and financial markets may also decrease.

Impact of Budget Deficit Financing on Money Demand in Nigeria

The study empirically investigates the impact of budget deficit financing on money demand in Nigeria with an objective of finding the effect of budget deficit financing indicators such as external debt financing, domestic debt as well as debt servicing on money demand. The study is modeled using a framework of Keynesian theory of budget deficit financing and Richadian Equivalent hypothesis. The study adopted an auto redistributive lag model (ARDL) which shows the existence of long run relationship between money demand and indicators of financing budget deficit and ordinary Least Square. The general findings revealed that external source of financing budget deficit, internal source of financing budget deficit as well as debt servicing has a significant effect on money demand in the Nigerian context. Base on this findings, the study recommend that external and internal source of financing deficit should be encouraged for effective demand leading to economic stability reasons and not for political reasons and it should be properly channeled to productive sector of the economy that will enhance economic stability.

Effect of Deficit Financing on Economic Growth in Bangladesh: Cointegration and VECM Approach

Bangladesh has been encountering a budget deficit since 1972 because of a decrease in the source of income. This paper aims to examine the effect of budget deficit financing on economic growth in Bangladesh throughout 1981–2018. Using secondary data, the paper uses the cointegration test, vector error correction mechanism (VECM) and Granger causality test. Johansen’s cointegration test outcomes find that the study variables are cointegrated and subsequently have a long-run nexus among the variables. The study finds that in the long run, government domestic debt (GDD), government external debt (GEXD) and money supply (MS) affect positively economic growth (RGDP). The outcomes of the VECM approach express that in the short run, GDD, external debt and MS negatively affect economic growth. Also, short-run causality runs from the GDD, GEXD and MS to economic growth. The Granger causality test result shows unidirectional causal nexus running from GDD to RGDP, RGDP to external debt and GEXD to MS, and bidirectional causal nexus between MS and GDD in Bangladesh. The study suggests the governments should enhance moderate levels of domestic and external borrowing and uses it in productive and efficient ways to accelerate economic growth in Bangladesh.

MACROECONOMIC EFFECTS OF BUDGET DEFICIT IN NIGERIA

This study probed the macroeconomic effects of budget deficit in Nigeria. Specifically, it seeks to probe the effect of budget deficit on private investment and public investment in Nigeria by adopting the ADF unit root test and ARDL model, Granger Causality test and the short-run diagnostics and stability using annual time series data covering 37 years from 1981 to 2019. The variables employed include – Growth rate of real gross domestic product, private investment (Gross Fixed Capital Formation) as a percentage of GDP, public investment measured as ratio government capital expenditure to GDP, budget deficit, money supply measured as ratio of GDP, inflation rate measured by annual year-on-year inflation rate, interest rate, labour force participation rate. The research findings admitted that, budget deficit have positive and significant impact on economic growth in Nigeria. Therefore, government budget deficit has no crowding out effect on investment. The study also reveals that budget deficit has negative and insignificant impact on private investment in Nigeria. In addition, further investigation shows budget deficit have positive and significant impact on public investment in Nigeria. Also, the study asserts that there is unidirectional causality running from budget deficit to economic growth, private investment and public investment. Based on the research findings of this study, Government must ensure and maintain strong fiscal discipline without compromising the wellbeing of the citizenry by allocating budget spending to sectors that can translate the deficit into high economic growth both in the short and long runs. Furthermore, budget deficit financing in Nigeria should be focused on the productive sectors of the economy. This is because deficit financing has merely resulted in economic instability indicating that sound policies are needed to achieve economic stability in Nigeria.
 
 JEL: E02, H61, E22
 
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Role and impact of public debt in financing budget deficit and economic growth - with special study in Kosovo

In this paper, we present the processes of public debt development in Kosovo for the period of its functioning, respectively from 2009 until 2018. There is no long history of it, but there is a dyn...

Role and impact of public debt in financing budget deficit and economic growth - with special study in Kosovo

Role and impact of public debt in financing budget deficit and economic growth - with special study in Kosovo