Fiscal Deficit Research Articles

Comparative Analysis of the Budget of Sri Lanka and the State Budget of Punjab, India

This research paper provides a comprehensive analysis of the national budget of Sri Lanka and the state budget of Punjab, India. By examining the structure, revenue sources, expenditure patterns, fiscal deficits, and socio-economic priorities of both regions, this paper aims to highlight the differences and similarities in budgetary approaches and their implications for economic development and public welfare. The comparison sheds light on how a sovereign nation and a state within a federal structure allocate their financial resources to achieve their policy objectives. This paper also includes a statistical analysis of key budgetary figures to provide deeper insights into their fiscal health and management.

Tantangan dan Strategi Penerapan Kebijakan Tarif PPN 12%

Increasing the VAT rate is one way for the government to increase tax revenue and address the fiscal deficit. The Indonesian government in 2022 has increased the VAT rate to 11% and 12% in 2025. The increase in the VAT rate to 12% has the potential to be a factor that affects the Economy, Business, and Tax Obligations of Taxpayers. The purpose of this study is to analyze the factors that could be a challenge in implementing a 12% VAT rate and the strategies that the Indonesian government can use to overcome these challenges. The research was conducted qualitatively and data was collected through a literature review. The results show that the challenges faced by the government in implementing the 12 percent VAT rate policy may be caused by the factors of increased tax administration costs, the effect on business and economy, as well as the political system and governance of government institutions. These challenges can be overcome by gradual socialization with the public and building partners, synergizing and correlating fiscal and monetary policies, and political commitment from politicians to support the policy of increasing the VAT rate to 12% so that its implementation can run well.

Budget Deficit and Economic Growth in Nigeria: An Empirical Analysis

This study was expected to investigate the impact of Budget Deficit on economic growth of Nigeria between 1983 and 2023. Ex – post facto research design was accepted; annual time series data for analyses were collected from Central Bank of Nigeria Statistical Bulletin of 2022. Real Gross Domestic Product (RGDP) was used as the explained or dependent variable proxy for economic growth. budget deficit (BDF), inflation (INF) and money supply (MS) all represent explanatory or independent variables. The study employed Auto Regressive Distributed Lag (ARDL) Model which was used to analyzed and evaluate the coefficients of the model’s parameters. Other diagnostic tests employed by this study include; unit root test, descriptive statistics, correlation coefficient matrix, Cointegration test and test of Normality, and they confirmed the validity and reliability of the model used; the inferential results showed that budget deficits impacted significantly on the economic growth of Nigeria under the review period. The paper recommended strongly that the country should display a high degree of transparency in its fiscal policies or operations by directing its fiscal deficits present towards investments that will increase productivity such as building roads, providing electricity and encouraging Foreign Direct Investments (FDI). The paper equally recommended inflation targeting in order to achieve a non-inflationary trend economy purposely to achieve the macroeconomic goal of price stability. The policy makers should direct capital and financial resources of government toward targeted programs like employment opportunity in productive ventures.

Building the Empirical Puzzle on Impact of Macroeconomic Determinants on GST Revenue: An Empirical Investigation via ARDL Bound Test Perspective

ABSTRACTThe revenue mobilization remains a challenge for many countries, especially developing countries such as India. Therefore, this study explores the macroeconomic determinants of Goods and Service Tax (GST) revenue of the government in India as GST constitutes a major share in the Own Tax Revenue (OTR) of the government in India. The current study has employed the Auto Regressive Distributed Lag (ARDL) model to examine the macroeconomic determinants of GST taxation revenue of the government in India. The results reveal that foreign direct investment, depreciation in the exchange rate and foreign exchange reserves have a favorable impact on the GST revenue of the government in India. Furthermore, the gross fiscal deficits of the government and inflation have a detrimental effect on the GST revenue collection of the government in India. The results of the study are supported by the Tanzi effect and the Tanzi–Olivera effect for the detrimental effect of inflation and gross fiscal deficit on the GST revenue of the government in India. The current study has major policy implications for the government, policymakers, and researchers. The empirical results illustrates that the government may put a stringent check on inflation and gross fiscal deficit of the country to improve their GST collections. Moreover, the government should try to focus on foreign direct investment, trade openness, and foreign exchange reserve in India to increase their GST revenue. Meanwhile, the current study can be used as a base for conducting future studies at national and international levels for examining the determinants of other taxation revenue of the government by incorporating other country specific variables. This study may act as a novel contribution to the available literature on the macroeconomic determinants of taxation revenue in India. To the knowledge, it will be the first study in India to especially explore the determinants of GST revenue of the government in India. However, the findings of the study need to be generalize in future by incorporating a larger sample size as GST is still in its introductory phase in India.

The asymmetric effect of fiscal deficits on macroeconomic stability in Nigeria: evidence from nonlinear autoregressive distributed lag (NARDL)

PurposeThe paper examines the asymmetric effects of fiscal deficits on selected macroeconomic variables in Nigeria, which include economic growth, exchange rates and inflation. The existing works of literature are premised on symmetry assumptions with dichotomous findings. In such situations, they suggest using a nonlinear approach as an alternative to checkmate the findings premised on linearity. This is critical, considering the perpetual fiscal deficit trends of Nigeria, which are considered a major economic problem in the country.Design/methodology/approachThe study employs nonlinear autoregressive distributed lag (NARDL) estimator using secondary data collected from the statistical bulletin of the Central Bank of Nigeria (CBN).FindingsThe results show that in the short run, both positive and negative shocks to the fiscal deficit have no effect on Nigeria's economic growth. The same is found on the negative shocks in the long run. However, positive shocks to the fiscal deficit have a long-run positive impact on economic growth. It is further revealed that, in the short run, positive shocks as well as negative shocks to fiscal deficits are positively related to the inflation rate. More so, long-run estimates show that positive shocks to the fiscal deficit have negative impacts on inflation, while negative shocks to the fiscal deficit have positive impacts on inflation.Originality/valueThis study introduces novelties to the understanding of the relationship between fiscal deficits and macroeconomic stability in Nigeria. It accounts for asymmetric and nonlinear features that are more aligned with the socioeconomic realities of real-world phenomena. This study also offers more insightful policy perspectives to enhance the fiscal profile of the country.

Is There a Link between Tax Administration Performance and Tax Evasion?

The performance of tax administrations (TAs) is usually described as their capacity to complete activities with the minimum of resources engaged. Accordingly, tax administration performance is a multifaceted phenomenon, and measuring and benchmarking its performance against other countries or regions remains a puzzle for researchers and practitioners. This paper introduces a new approach for measuring tax administration performance using the Composite I-Distance Indicator (CIDI) based on 11 individual performance measures from 35 European tax administrations over two consecutive years (2018–2019). For the given scores of tax administrations, we conducted a correlation analysis with (a) tax evasion loss and (b) the fiscal deficit of countries in which these tax administrations operate, aiming to assess the strength of the statistical relationship between these variables. The study highlights Denmark and the Netherlands as exemplary models for tax administration, with “Revenue Collection” being identified as a crucial driver of excellence and “Operational Performance” (such as “e-filing” and “on-time filing”) forming critical aspects of TA efficiency. Also, the study finds a negative correlation between tax avoidance and tax administration performance.

On the fiscal deficit and economic growth in sub-Saharan Africa: A new evidence from system GMM.

Using a two-step approach GMM, this study examines the short- and long-term effects of fiscal deficit on the economic growth of 42 Sub-Saharan African nations between 2011 and 2021. The World Development Index, the most reliable source, is where the panel data is taken from. Using the Levin-Lin-Chu and Hadri LM tests for unit root, it was determined that there is no risk of a random walk in the data. The study's findings indicate that while the fiscal deficit has short-term, positive, and significant benefits on the economic growth of SSA countries, it has long-term, negative repercussions. According to the system GMM's results, an increase in the fiscal deficit of SSA countries is linked to a short-term increase in economic growth of 0.036 percent, while an increase in the fiscal deficit of one percentage point is linked to a long-term decline in economic growth of SSA countries of 0.013 percent, holding all other factors constant. The study's findings also showed that the budget deficit has a larger positive short-run coefficient than a negative long-run coefficient. The study also revealed that while real effective exchange rates and inflation short-term hinder economic growth, gross fixed capital creation and real interest rates are the primary drivers of economic expansion. Long-term economic growth in the SSA countries is also found to be positively and significantly impacted by gross fixed capital formation. According to the study, SSA nations should manage their fiscal deficits and, in the long run, provide more funds for gross fixed capital development.

Fiscal policy in times of fiscal stress (or what to do when r > g)

South Africa runs a primary fiscal deficit and the long-term interest rate on government borrowing, r, is greater than the long-term economic growth rate, g. Without intervention, debt will continue to rise until there is a disorderly fiscal stop. Reforms to raise growth have not materialised, leaving fiscal consolidation as the second-best solution. Using a medium-sized, open-economy, fiscal DSGE model of South Africa, we show that the least cost policy is to impose a time-consistent fiscal policy rule with debt-to-GDP as the fiscal anchor and a pre-announced path for government consumption spending as the intermediate operational objective. This result obtains with and without explicit policy coordination between the fiscal and monetary authorities.

Excess capacity and hysteresis in EU Countries. A structural approach

We develop a structural method to estimate the rate of capacity utilization in 12 EU countries that consists of identifying the structural parameters of a Leontief production function, using a parsimonious theoretical specification. Parameters are correctly identified, stable and robust to alternative specifications. Our results provide evidence of persistent excess capacity and hysteresis in the rate of capacity utilization in many EU countries, especially after the 2008′s global financial crisis, thereby supporting the claim that larger fiscal deficits would have contributed to absorb excess capacity without producing persistent inflationary pressures or debt unsustainability. Despite the simplicity of our model, the method allows more complex macroeconomic specifications for country-specific applications.

Spillover effects of external economic shocks on African sovereign bonds

African nations face growing debt and default risks owing to fiscal deficits, falling commodity prices, weakening demands, the COVID-19 pandemic, and the Russia–Ukraine War. This study constructs multiple spread systems to examine the time-varying relationships between exchange rates and bond spreads in Zambia, Nigeria, and Egypt, which represent high-, medium-, and low-risk default nations, respectively, throughout the sample period and critical times by applying the BAVRSV model. This study reveals the linkage between the exchange rate and Egypt's spread is time-varying, but static in Zambia and Nigeria. Furthermore, Zambia's spread system is less stable than those of Nigeria and Egypt, with copper, crude oil, and wheat being key intermediates, respectively. The Federal Reserve rate changes, the COVID-19, and the Russia–Ukraine conflict influence the African bond spreads at different stages. The findings highlight the sensitivity of African bond spreads to exchange rates and provide valuable insights for bond investors.

Fiscal stance role for ECB monetary policy

The objective of this paper is to ascertain the presence of a crucial connection between euro area fiscal stance and ECB monetary policy. To achieve this, we employ the thick modelling approach for the Generalised method of moments to estimate ECB reaction functions with and without a projected fiscal deficit indicator from 2001 until 2022. The results reveal that the actions of the ECB have exhibited desirable effects of stabilising monetary policy, while the projected fiscal deficit was usually not statistically significant in explaining the ECB’s monetary policy stance. However, the sign of fiscal deficit coefficient was positive, implying a counter-cyclical nature of monetary policy with respect to the fiscal stance. This effect has become more evident since 2012, suggesting that the ECB might be taking into account euro area fiscal deficits as providing some indications for potential inflationary risks. Overall, these findings speak against the fiscal dominance or repression regime being prevalent in the euro area.

Understanding the local government debt in China

The alarmingly high level of local government debt (LGD) in China threatens the financial stability, fiscal system, and sustainability of China's economic success. This study provides a comprehensive and in-depth understanding of the evolution and causes of LGD expansion by investigating institutional details, developing conceptual frameworks through economic and institutional lenses, and conducting empirical analyses. Under the economic framework, we find that the demand-side (issuing LGD to fill the widening fiscal deficits) driver explains little about the rapid expansion of LGD in China except in the Northeastern region, while the supply-side driver (banks' and the public's asset needs) and investments in real estate and local employment are positively associated with LGD. Under the institutional framework, rent-seeking behaviors (capitalizing on executive power and institutional frictions), instead of resolving institutional frictions (connecting agents of different political and economic natures to achieve state goals through market mechanisms) is a significant determinant of LGD. These findings suggest that anti-corruption and system design (or supervision and incentives) in addressing the boundary between local government officials and businesses is critical for financial stability and economic sustainability in China.

The Effect of Budget Deficits on Stock Market Returns in Emerging Markets: A Panel VAR Analysis

This study examines the impact of fiscal deficits on stock returns. The sample covers emerging markets for the period 2016Q1-2021Q4. The analysis results using panel vector autoregression (PVAR) and Granger causality tests indicate that fiscal deficits cause stock returns. These results are confirmed for countries with low and medium levels of financial development and for European countries. However, in countries with high levels of financial development such as the BRICS and ASEAN countries, no effect is observed. It is also found that this effect disappears during the COVID-19 pandemic. The results of the study question the strong form of the efficient market hypothesis (EMH). According to the EMH, stock prices should fully reflect all available information. However, the impact of fiscal deficits on stock returns in low- and middle-income countries and European countries suggests that market participants may not fully reflect this information, addressing the existence possibility of markets that are not efficient in the strong form.

External Debt and Economic Growth Nexus in Sub-Saharan Africa: the Role of Institutional Quality

Sub-Saharan African (SSA) countries have recently embarked on an economic growth trajectory which is characterized by ambitious national development aspirations. The ability of the SSA economies to generate sufficient domestic revenues to spur their desired economic growth is limited resulting into fiscal deficits. External Debt has provided alternatives to the fiscal deficits prevalent in SSA economies. Dividends from external debt investments have been unevenly witnessed among the SSA countries. Regions with better institutional quality continue to reap considerable dividends from external debt investments while SSA economies continue to accumulate external debt with sluggish economic performance. This study made use of the Generalized Method of Moments (GMM) to examine the role played by institutional quality on the nexus between external debt and economic growth on a panel of 28 SSA countries over the period 2005 - 2021. Empirical results indicate that institutional quality influences a positive and significant relation between external debt and economic growth. Policy makers in SSA countries should therefore strive to improve on institutional quality in regard to external debt management in order to reap more economic benefits from external debt

Deficit financing and consumption: a study of Indian private consumption expenditure

The study reinvestigates the 'Ricardian Equivalence hypothesis in India by taking private consumption as the dependent variable. The study aims to empirically study the impact of debt financing versus tax of fiscal deficit in the Indian context, as Indian policymakers primarily rely on fiscal policy as a tool for economic stability and growth. ARDL, FMOLS and DOLS approach was used by taking annual time series data from 1988 to 2023. The study reinvestigates the 'Ricardian Equivalence hypothesis in India by taking private consumption as the dependent variable. Government expenditure, public debt, tax, domestic income, and liquidity constrain as independent variables. The estimates confirm a significant symmetric as well as symmetric long-run and short-run relationship between the variables; the results reject the Ricardian Equivalence and propound the Keynesian approach that financing the fiscal deficit (debt vs tax) does matter to the private consumption expenditure. The positive and significant coefficient shows that the increase in liquidity will lead increase in private consumption expenditure. Over-reliance on debt financing strategies has a significant influence on domestic private consumption. The liquidity constraints, fiscal policies will be able to reallocate resources from the future to the present. Since debt financing of deficits and liquidity substantially influence India's consumer spending, expansionary fiscal policies should be carefully devised and supported. This study contributes to the existing literature on deficit financing and 'Ricardian Equivalence' by giving new evidence on designing sustainable fiscal policy by spending wisely without imperilling the country's consumption expenditure.

An Exogenous Risk in Fiscal-Financial Sustainability: Dynamic Stochastic General Equilibrium Analysis of Climate Physical Risk and Adaptation Cost

This research aims to explore the fiscal and public finance viability on climate physical risk externalities cost for building social-economic-environmental sustainability. It analyzes climate physical risk impact on the real business cycle to change the macroeconomic output functions, its regressive cyclic impact alters tax revenue income and public expenditure function; This research also analyzes that the climate physical risk escalates social-economic inequality and change fiscal-financial policy functions, illustrates how the climate damage cost and adaptation cost distorts fiscal-finance cyclical and structural equilibrium function. This research uses binary and multinomial logistic regression analysis, dynamic stochastic general equilibrium method (DSGE) and Bayesian estimation model. Based on the climate disaster compensation scenarios, damage cost and adaptation cost, analyzing the increased public expenditure and reduced revenue income, demonstrates how climate physical risk externalities generate binary regression to financial fiscal equilibrium, trigger structural and cyclical public budgetary deficit and fiscal cliff. This research explores counterfactual balancing measures to compensate the fiscal deficit from climate physical risk: effectively allocating resources and conducting the financial fiscal intervention, building greening fiscal financial system for creating climate fiscal space.

Making the Ethiopian Banking System Ready for Green Growth and Development

ABSTRACT After two decades of high economic growth and fast development progress, Ethiopia is facing significant macroeconomic challenges such as high inflation, foreign exchange shortage, and slowing growth. At the same time, it is imperative to bring the economy on a green and climate-resilient development path. In this context, the financial sector has an essential role to play. International financial institutions recommend reducing the fiscal deficit to dampen money growth and inflation and giving up exchange rate control. Based on an alternative analysis of inflation, this article argues that money supply restrictions and fiscal austerity may not only prove ineffective in addressing inflation while incurring high economic costs, but also impede a response that comes via productive and green investment to ease the economy’s supply-side constraints and to lower inflation. Rather than fixating on the quantity of money and market exchange rates, central banking should focus on the direction of financial flows to make sure they go into real green investment rather than speculative and inflation-driving investment. This policy blueprint will also reduce balance-of-payments problems and improve both internal and external monetary stability.

An Empirical Analysis of Short Run and Long Run Association between Debt Servicing and External Debt in Pakistan

Pakistan is at a crucial juncture where the escalating debt servicing cost of Rs 7.3 trillion is set to consume the majority of the projected revenue of Rs 9.2 trillion, which includes Rs 5.2 trillion allocated to the provinces. This study explores the interaction between debt servicing and external debt stock in Pakistan. It analyzes the impact of variables such as the debt service ratio, fiscal deficit, exchange rate, and globalization on external debt stock, using annual data from 1990 to 2020 obtained from the World Development Indicators (WDI) and the Pakistan Economic Survey. The stationarity of the variables is tested using the Augmented Dickey-Fuller (ADF) test. The Auto-regressive Distributed Lag (ARDL) bound test is utilized to investigate the long-term relationship among the endogenous and exogenous variables, and the Error Correction Model (ECM) is applied to study short-term dynamics. The findings indicate a negative long-term relationship between debt service and external debt, while fiscal deficit, exchange rate, and globalization show significant positive correlations with foreign debt. The study provides policy recommendations to alleviate the external debt burden.

Towards A Debt-Overhanged Economy: Causes and Consequences for the Economy of Pakistan

The reliance on debt is not only essential but also a key factor in economic growth of poor countries like Pakistan because of a meager tax base and an annuity of fiscal deficit. Trade surplus is a common tool that covers the budget deficit but twin deficit makes the economic conditions worst. The excessive borrowing can stimulate the economic cycle in the short run but in the in the long-run it creates the issues of debt-overhang. This timely study is an attempt to investigate the short-run and long-run dynamics of debt on the economy of Pakistan. The empirical results (ARDL co-integration) suggests that long-run relationships exist among the variables under consideration such as Exports and Remittances have negative effects on debt, while other variables have positive effects. The Error-Correction-Model (ECM) analysis indicates mean-reverting behavior, where the dependent variable returns to its long-run equilibrium. Post-estimation tests support the model's assumptions. The Jarque–Bera test shows that residuals exhibit normal distribution. CUSUM and CUSUMsq tests indicate reliability and stability of the regression model. There is a long-run relationship between exports of goods and services (EGS), imports of goods and services (IGS), gross fixed capital formation (GFCF), net official development assistance (NOD), personal remittances (PRR), and debt in Pakistan. In the long-run, Exports of goods and services have a negative impact, Imports of goods and services have a significantly positive impact, Gross fixed capital formation has a positive impact, Net official development assistance has a positive impact, Personal remittances have a negative impact on debt respectively. However, Trade as a percentage of GDP has an insignificant impact on debt in the long run. The study also found that the impact of each variable on Debt is different in the short run. Overall, the study provides valuable insights into the factors that affect Debt in Pakistan.

Beyond the basics: mapping the inflation response to fiscal deficit in India with smooth transition autoregressive model

PurposeIndia’s historical fiscal performance has featured elevated deficit levels. Driven by the imperative need for fiscal stimulus measures in response to the crisis, efforts toward fiscal consolidation from 2003 to 2008 were reversed in 2008–2009 due to the financial crisis. These stimulus actions are believed to have wielded a notable influence on inflation dynamics. Presumably, a high inflation rate hinders growth and inflicts severe welfare costs. Accordingly, the principal objective of this paper is to scrutinise the threshold effects of fiscal deficit on inflation within the context of the Indian economy.Design/methodology/approachWe employed the Smooth Transition Autoregressive (STAR) Model, a robust tool for capturing non-linear relationships, to discern the specific threshold level of fiscal deficit. Our analysis encompasses annual data spanning from 1971 to 2020. Additionally, we have leveraged the Toda-Yamamoto causality test to establish the existence and direction of a causal connection between fiscal deficit and inflation in the Indian economy.FindingsOur analysis pinpointed a critical threshold level of 3.40% for fiscal deficit, a value beyond which inflation dynamics in India undergo a marked transition, signifying the presence of significant non-linear effects. Moreover, the results derived from the Toda-Yamamoto causality test offer substantiating evidence of a causal relationship originating from the fiscal deficit and leading to inflation within the Indian economic framework.Research limitations/implicationsThe findings of our study carry significant implications, particularly for the formulation and execution of both fiscal and monetary policies. Understanding the threshold effects of fiscal deficit on inflation in India provides policymakers with valuable insights into achieving a harmonious balance between these two critical economic variables.Originality/valueTo the best of our knowledge, this study is the first of its kind to empirically investigate threshold effects of fiscal deficit on inflation in India from a non-linear perspective using the Smooth Transition Autoregression (STAR) model.