Authors Nur Hayati Abd Rahman

Year 2012
Objective To investigate the relationship between budget deficit and economic growth
from Malaysia’s perspective
Data (1) Quarterly data derived from Central Bank of Malaysia [from second quarter
of 2000 to the second quarter of 2011]
Method Model (1) :
y = f (debt, prod, unprod)

y : growth of Real Gross Domestic Product (GDP) as a proxy of the economic

growth
debt : growth of federal government’s debt as a proxy of the budget deficit
prod : growth of productive expenditures
unprod : growth of non-productive expenditure

Model (2) :
Autoregressive Distributed Lag (ARDL)

ΔYt = α0 + Σβ1ΔDEBTt-i + Σβ2ΔPROD t-i + Σβ3ΔUNPROD t-i + δ1Yt-1 +

δ2DEBTt-1 + δ3PRODt-1 + δ4UNPRODt-1 + μt

Estimation techniques (2) :

- Setting null hypothesis Ho : δ1 = δ2 = δ3 = δ4 = 0 to test whether debt,
prod, and unprod have long-run relationship with economic growth.
- Inference by using F-test
- If Probability of F-statistic is significant, so Ho is rejected. It is proven
that there exists long-run relationship, vice versa.
Findings - The Probability of F-statistic is 0.0014 at five confindence level,
therefore the null hypothesis is rejected. It is proven that there exists
long-run relationship between Y, debt, prod, and unprod.
- The only variable that is significant in explaining the long-run
relationship of the economic growth is productive expenditure. Federal
government’ debt and unproductive expenditures have no significant
relationship in explaining the economic growth of Malaysia in the long-
run.
- The productive expenditures spent by the Malaysian government for the
specified purposes did help in increasing the GDP growth of Malaysia.
- The ECM coefficient -1.8054 suggest that if there is any shock to the
Malaysian economy, the changes in the level of economic growth and
productive expenditures will help the economy to converge to the state
of equilibrium at a faster rate.

Overall : There is a significant long-run relationship between productive

expenditures and economic growth of Malaysia. Both variables are positively
related. However, there is no such evidence that can prove the existence of long-
run relationship between budget deficit and economic growth or non-productive
expenditures and economic growth. This result is parallel with the Ricardian
equivalence hypothesis.
Authors Goher Fatima, Mehboob Ahmed, Wali ur Rehman
Year 2012
Objective 1. To investigate the impact of budget deficit on the GDP growth
2. To propose a suitable policy implication to overcome the budget deficit
Data (1) International Financial Statistics (2009) period 1978 - 2009
(2) Economic Surveys of Pakistan period 1978 - 2009
Method Model :
OLS (Ordinary Least Square)

Ln (GDP) = β0 + β1 ln (INFL) + β2 ln (EXCH) + β3 ln (RIR) + ln β4 (BD) +

ln β5 (GI) + u

GDP = Gross Domestic Product

INFL = Inflation
EXCH = Real Exchange Rate
RIR = Real Interest Rate
BD = Budget Deficit
GI = Gross investment
u = Stochastic Error Terms
β0, β1, β2, β3, β4, β5 are the respective parameters.

Estimation techniques (2) :

- Setting null hypothesis Ho : β4 = 0 and H1 : β4 ≠ 0
- Inference by using t-statistic and F-statistic
- Unit root test, Heteroscedasticity test, Autocorrelation test, Jarque-Bera
test, Ramsey Reset test,
Findings - The budget deficit has a significant and negative impact on the economic
growth of the economy that 1% increase in BD results in 0.11 times
decrease in the GDP.
- The value of R2 (0.803) represents that 80% of the variations in the
dependent variable is due to independent variables include in the model.
- The other variables included in the model also has a significant affect the
economic growth
- The model is free from the problem of autocorrelations (DW = 1.515)

Overall : Budget deficit has negative impact on the economic growth in Pakistan.
Government can increase the ratio of the direct taxes and the indirect taxes as a
solution. Introduction of new forms of the taxes are also one of the solutions to
increase the revenues of the government.
Authors Mansoor Arjomand, Karim Emami, Farshid Salimi
Year 2015
Objective To investigate the relationship between economic growth and labor productivity
and the effect of budget deficit on the economic growth of MENA countries
within 2000-2013.
Data (1) Data of ten selected countries of MENA region including Egypt, Iran, United
Arab Emirates, Jordan, Kuwait, Lebanon, Morocco, Oman, Syria and Tunisia
within 2000-2013
Method Model (1) :
Estimated Generalized Least Square (EGLS)

BDit = α0 + α1 LPit + α2 GDPit + α3 INFit + εit

Model (2) :
Estimated Generalized Least Square (EGLS)

GDPit = β0 + β 1 LPit + β 2 BDit + β 3 INFit + εit

BD : Government Budget deficit

LP: Labor productivity
INF: Inflation
GDP : Gross domestic product (% GDP Growth)

Estimation techniques :
- Group significance test by using F-stastistic. If F-statistic is larger than
tabular F (significant), so Ho of equal intercept is rejected.
- Hausman Test to examine H0 indicating consistency of random effect
estimations. If H0 rejected, steady effect estimation would be used.
- Wooldridge test is one of the tests used for detecting autocorrelation
(serial correlation) in panel data.
Findings (1)
- Regarding to Hausman test result that random effect model was accepted
- There is positive effect of economic growth and inflation rate variables
on government budget deficit. An increase in economic growth and
improved production would intensify government incomes and reduce
government budget deficit.
- The negative relationship between labor productivity and government
budget deficit
- Keynesian theory is totally functional in MENA countries, where the
theory predicts that budget deficit is negatively correlated with
unemployment; on the other hand, it is positively related to the economy
real growth rate
(2)
- The positive effect of labor productivity on economic growth. The
positive effect of this variable shows that the more attention to labor
productivity, the higher GDP and economic growth.
- Negative correlation of government budget with economic growth.

Overall : Budget deficit has negatif effect on economic growth

Authors Willie J. Belton, Richard J. Cebula
Year 1992 (posted 2015)
Objective To examines the impact that budget deficits exercise on economic growth in the
United States.
Data (1) Quarterly data for the United States for the period 1955-1989
(2) The seasonally adjusted middle expansion trend GNP data from Holloway
(1986) and the Survey of Current Business.
(3) The tax rate data from the Statistical Abstract of the United States.
(4) The population, real GNP, government purchase, deficit and net export data
from various issues of the Economic Report of the President.
(5) The open market operations data from the Flow of Funds Accounts of the
Federal Reserve System.
Method Model (1) :
Estimated Generalized Least Square (EGLS)

CHPCYt = a + b Dt-2 + c Gt-1+ d MAXt-2 + e CORPt-1 + f Mt-2 + g NXt-1

+u

CHPCYt = the seasonally adjusted percentage change in the per capita real
GNP in quarter t;
a = constant;
Dt-2 = the seasonally adjusted federal budget deficit in quarter t-2,
expressed as a percent of the seasonally adjusted middle-
expansion trend GNP in quarter t-2.
Gt-1 = the seasonally adjusted federal government purchases of goods and
services in quarter t-1, expressed as a percent of the seasonally
adjusted middle-expansion trend GNP in quarter t-1;
MAXt-2 = the maximum marginal federal personal income tax rate in quarter
t-2, expressed as a percent;
CORPt-1 = the maximum marginal corporate income tax rate in quarter t-1,
expressed as a percent;
Mt-2 = the ratio of the seasonally adjusted net acquisitions of credit market
instruments by the Federal Reserve System in quarter t-2 to the
seasonally adjusted middle-expansion trend GNP in quarter t-2,
expressed as a percent;
NXt-1 = the seasonally adjusted balance of trade in quarter t-1,
expressed as a percent of the seasonally adjusted middle-
expansion trend GNP in quarter t-1;
u = stochastic error term.

Estimation techniques :
- Inference by using t-test
- Re-estimate equation with two omission with which were not statistically
significant.
- Cochrane-Orcutt Procedure
Findings - government purchases exercise only a weak positive impact on economic
growth
- the budget deficit acts to significantly reduce the economic growth rate
- higher income tax rates [both personal and corporate] significantly
reduce the economic growth rate.
- Over the long run, reduced government deficits and income tax rate cuts
can be expected to yield major benefits for the United States in terms of
higher economic growth