IMPACT OF BUDGET DEFICIT

ON THE ECONOMIC GROWTH

INTRODUCTION
IN this study the author determine the impact of budget deficit on the economic
growth in Pakistan .IN this study the author says that the government of the
Pakistan examine that the budget deficit of the every year which tells that about
the expected that the revenues and expenditures of the coming financial year .HE
says that the government gain the revenues from varies sectors such financial
institutes ,INTEREST ,from loans ,TAX REVENUES etc .

THE expense of the government depend on the varies developemental and non
developmental projects .HE tells the situation of balance budget is that if the
receipts of the government are equal to the expense .HE tells about the situation
of the budget deficit is that if the government revenues are less than its receipts .

ALL the developing countries face the problem of the budget deficit .Pakistan is
also one which face the problem of the budget deficit .IN this paper the author
says that for the progress of any organization planning is the very important
factor .

FOR the success or failure of any organization .IT depends upon the planning .IF
the workers of the organization works for efficient planning then this organization
is going for success but if the workers or employres of the organization does not
work in an efficient way then this organization is going for failure .

THERE are many types of the planning for any organization .THE author use the
term which is the financial planning which is use for the budget .

THE author says that budget is avery important tool for the financial
planning .THEY says that with the help of this financial planning term which is
known as the budget which is use for making the developmental policies for any
country .

IT means the progress of any country depend how can government use this
financial term such as known as the budget .

THE author determine that budget deficit occurs when the expenditures of the
country exceeds its total income .IN this study the author determine the role of
investment on the economic growth .

THE author devide the investment in to two categories which one is known as the
public investment and the other one is known as the private investment and they
iiexamine the impact of political and macroeconomic uncertainty on the
economic growth of the Pakistan

.Author says that investment plays an important role of economic growth .IN the
last 60 years Pakistan economy have an average growth rate of 4 percent .THE
author examine that the periods in which Pakistan economy increases their
growth rate .

IN this study the author examine the impact of public debt on the economic
growth .Author examine that Pakistan face a serious socio economic problem
which was the problem of the low tax rate and twin deficit .Public debt is an
important tool which is used to control the government financing gap .

IN Pakistan if public debt much increases that is it has greater to the GDP which
decrease the income per capita .ALL this happens which is cause of the
mismanagement and bad planning of the government .
IN this study the author examine that for the progress of any country depend
upon the GDP and GDP depend how can this country works .ONE of the major
component for the progress of the country is that how does their investors invest
their income for the developing purpose of the country.IN THIS study the author
examine that a large part of the countries spend their income for the developing
purpose and which is the part of the GDP .

THE author examine that developing countries does not spend most of their
income for the developing purpose .THE author says that investment is the major
tool of the economic growth .

Economists says that investment is the one of the major component which is used
for the production and they use to produce other goods .

THEY says that for the development of any country investment is the one of the
major component of the GDP .THE author says that Pakistan does not more
investment for the developing purpose due to increase in population .

THEY says that due to increase in population which creates many problems such
as they reduce the savings which is the cause of the food and energy inflation and
this the cause of the political and economic uncertainty.

THE main purpose of this study is to determine the relationship between gross
domestic product and budget deficit of Pakistan .THE author introduce two
different terms which one is the economic growth and the other one is the
economic development .

NAJID AHMAD point out that the importance of investment for economic growth
of Pakistan .HE suggested that investment is important for economic growth .HE
views that as one percent increase in investment will increase GDP by 0.89
percent .NAJID AHMAD determines the relationship between GDP and energy
consumption .

IN this paper the main purpose of the study is to determine the relationship
between government revenues and expenditures in the long run .
THE author says that for the improvement of any society it is necessary for any
government that it should design the budget .Budget deficit is a situation in
which government revenues are less than the government expenditures .THE
budget deficit situation occur all the years of the study .

THE author says that government should decrease the unemployment rate of the
society use the budget deficit .

TO determine the financial policy which decrease the budget deficit it is

important to search the relationship between government revenues and the
expenditures .

IN this paper the main purpose of the study of the author is to determine the
relationship between public spending ,foreign direct investment and economic
growth of the Pakistan .

THE author says that foreign direct investment and public spending play an
important role to the impact of the economic growth .They said that FDI affect
the economic growth with the help of improvement in technology knowledge
and physical capital of the country .

THE author says that public spending affect the economic growth with the help of
improvement of the infrastructure .

IN THIS research paper the purpose of this study is to check the relationship
between budget deficit and their ratio to the gross domestic product and interest
rate .

THE fiscal position of government and suggestions to check that how the budget
deficit affect the decisions of the household .RICARDIAN says that unemployment
and inflation is the cause of the budget deficit .

HYPOTHESIS
TO check the impact of the dependent and independent variables .WE need to
make the two hypothesis .One is null hypothesis and the other one is the
alternative hypothesis .The null hypothesis that is H0 tells that in the study of the
independent variables which are the foreign direct investment and they are use
to estimate the impact of budget deficit on the economic growth .

And the alternative hypothesis is the H1 and this the explanatory variable and this
variable is inflation which are used in the model and this is the less efficient
variable as which is compare to the investment and domestic product of the
Pakistan .THE author examine that investment is the explanatory variable of the
model .They says that they has a positive and significant impact on the economic
growth of the country .

SO the author reject the alternative hypothesis and accept the null
hypothesis .THE author says that they determine the results of that budget deficit
has a negative impact on the economic growth .

MAIN OBJECTIVE
THE PURPOSE of this study is to determine that how can domestic product effect
the budget deficit .

SUB OBJECTIVES
1 What are the causes of the budget deficit .

2 How budget deficit has an impact on the economic growth .

3 To determine the impact of budget deficit on the economic growth .

4 TO estimate the relationship between budget deficit and economic growth .

5 TO empirically test the impact of budget deficit on economic growth of the

Pakistan .
LITERATURE REVIEW
MUHAMMAD ASLAM AND GHULAM SHABIR they determine the macroeconomic
impact of budget deficit on the foreign sector .THEY use the ordinary least square
technique to check the relationship between budget deficit and domestic credit .

They examine that there is a positive relationship between budget deficit and
domestic credit .GOHAR FATIMA AND WALI UR REHMAN determine the
relationship between fiscal deficit and economic growth .They use the time series
data and they examine that the fiscal deficit effects the economic growth directly
and indirectly .

KRAMAT ALI determine the relationship between public debt burden and
economic growth .They use the time series data and they examine that there is a
negative relationship between public debt and economic growth of the country .

AHMAD AND MILLER works for the cross section data and they use the ordinary
least square model to examine the budget deficit .THE author devide the study
into two parts one is the fixed effect and the second is the random effect .THEY
examine that if the government spend most of their income for the vsecurity
purpose .

They says that they decrease the investment and the other one cause of the
budget deficit is that government spend most of their income which is the part of
the budget on the consumption sector which decrease the revenues .
They examine that as investment should decrease which generate the less
revenues and they cause the budget deficit .According to AL KHEDAR they
examine the impact of interest rate in the short run as well as in the long run .

They examine that due to the budget deficit interest rate s showing the increasing
trend .BUT in the long run due to budget deficit they does not show any trend and
they use the VAR model to check the impact of interest rate on the economic
growth .

AISEN AND HAUNER examine the impact of interest rate on the economic growth
and they examine that there is a negative relationship between interest rate and
budget deficit .

ASCHAURE examine that the capital is the main and important factor of economic
growth .AND some author views that public investment has a negative impact on
economic growth and private investment has a positive impact on the economic
growth .KEYNES says that in the developing countries central bank does not print
the currency notes .

External debt has a positive and negative impact on the economic growth .ISLAM
examine that there is a weak positive relationship between debt and economic
growth .

IN the view s of Pakistan many studies examine the impact of public capital on the
economy and they determine that in the national productivity of the country
public capital has a positive and significant impact .

Pakistan does not invest for the developing purpose as the other countries such
as south ASIAN and south east ASIAN countries .These countries invest a large
part of the income on the developing purpose .

THE author examine that the total investment is the 22.9 percent which is the
part of the GDP and they should decrease as the years was going.IN this study the
author examine that the external debt works for the both purpose as they work
for the positive purpose as well as they work for the negative purpose .
HE says that if the government utilized these resources as for the power
generation and health supply ,education ,then the external debt has s positive
impact on the economic growth .AS if the government does not utilized for the
efficient purpose such as if they does not utilized on the improvement in the
health facilities and the betterment in the education facilities .

SO then there is a negative impact of external debt on the economic

growth .ISLAM examine the impact of debt on the economic growth and they use
the time series data to check the relationship between debt and economic growth
and they examine that there is a weak positive relationship between the debt and
the economic growth .

THE traditional views that about the domestic debt and economic growth .They
says that there is a negative relationship between public debt and economic
growth .

RICARDIAN views that there is a neutral relationship between domestic debt and
economic growth .They use the cointegration test to check the relationship
between domestic debt and economic growth .

ABBAS AND CHRISTENSEN determine the impact of domestic debt and economic
growth and they study the 93 countries and they examine that in the developing
countries domestic debt works for the improvement in the market .

THE author views that domestic debt crowds out the private
investment .WOODFORD examine that the relationship between deficit and
inflation .The author says that inflation is the cause of the budget deficit .

Monetrist also views that inflation is the cause of the budget deficit and they use
the fiscal theory of the price level to determine the cause of the budget deficit .

PLOSSER use the data of the 12 countries and they says that budget deficit does
not significant impact on the money growth and inflation .

BARROW examine the impact of interest rate on the economic growth and they
says that there is a positive relationship between interest rate and budget deficit
because in this situation of inflation the bonds prices are high so there is
appositive relationship between budget deficit and interest rate .

GHALI AND AL SHAMI they examine the relationship between investment and
economic growth .They says that for the progress of the country government
should take step to increase the investment .

GULCAN AND BILMAN they examine the impact of real exchange rate on the
economic growth they use the cointegration method and causality test .They
examine that there is a positive impact of budget deficit on the economic growth .

BLACKLEY search that if the federal government increase the tax revenues which
increase in spending but at the low level .VON FURSTEN BERG GREEN AND JEONG
they said that spending increases in the cause of the tax increases at the federal
level .Some author views that in the short run there is no efficient role of the
relationship of the government revenues and expenditures .

KEYNESIAN views that about the budget deficit they have a positive relationship
between budget deficit and economic growth .

RICARDIAN views that there exist a neutral relationship between budget deficit
and economic growth .

NOR HAYATI determine the relationship between budget deficit and economic
growth . SHE said that they have no relationship between budget deficit and
economic growth .

BOSE search that there is a positive relationship between budget deficit and
economic growth in the 30 developing countries .
THE author views that about the foreign direct investment .They says that FDI
play the role of direct as well the indirect effects on the performance of economic
growth in the developing countries .T HE DIRECT BENEFITS ARE the reduction in
cost and the limited saving in developing countries .

The indirect benefits are rises the production ,knowledge ,competition and
exports . THE KEYNESIAN VIEW about FDI is that they says that public spending
play an effective role in growth .THE CLASSICAL views that public spending is that
they says that public spending an important tool to affect the economic growth .

They generate a relationship between the federal budget deficit and interest rates
in the US .They research a large number of researchers BOTH ET AL,CARLSON
AND SPENCER .THE empirical studies are conclude in IS LM Model .

METDODOLOGY
DATA AND THE SOURCES OF
THE DATA
The author use the time series data .THE author collect the data from different
sources .These sources are the world developmental indicator ,economic survey
of Pakistan and IFS .
THEROTICAL FRAMEEORK
This study is used to check the impact of budget deficit on the economic growth
of Pakistan .The author use the time series data from the year 2000 to 2014 .

The author use the OLS method to check the impact of budget deficit on the
economic growth .The author tells the variables which are in the table .

Y=a+B1bd +B2Inv +B3Dc +B4Inf +ut

WHERE

Y=GDP

BD =Budget deficit

INV =investment

INF =Inflation

Ut =Error term

The author use the GDP as a dependent variable and independent variables are
the budget deficit ,Investment which means the foreign direct investment and
inflation which tells that how much change in these variables .The impact of
budget deficit situation of a country on the economic growth .

According to the model the author use the equation .The following equation use
the regression model and the author examine that how much these variables
which are budget deficit ,investment and inflation affect the dependent variable
which is GDP .

The author examine that these factors are balances or not .THE author use the
independent variable to check the impact of the independent variables on the
economic growth and this independent variable is the investment which means
the foreign direct investment .
Foreign direct investment is that investment which comes from the outside of the
country .

The author says that this investment depend upon the production and the
capacity of the income of the economy .

The author examine that in this study and they says that inflation is the major
cause of the budget deficit .THE author says that in some conditions inflation has
a positive impact on the economic growth .

ECONOMETRIC STATIGIES
The author use the ordinary least square technique which are used to check the
impact of budget deficit on the economic growth .OLS technique is an
econometric technique which are used to examine the economic model .

This technique is used to search that the estimates of the model are good or not
good .The author says that this model is used the multiple regression to run the
model for the estimation .

Multiple regression is an approach of the ordinary least square methodology in

which a regression model does not work for the single independent variable but
this model works for the use of the multiple independent variables which are lies
in the model .

Y=a+B1bd +B2Inv +B3Dc +B4Inf +ut

The author study about this equation tells that a is used as the intercept
coefficient which tells that when all the independent variables included in the
model are equal to the zero than what will be the value of the dependent variable
.
The coefficients which are used as the independent variable these are B1,B2,B3
and B4 . These variables tells that the change in the corresponding independent
variables how much change will lies in the dependent variable .

Error term tells that the independent variable which are the outside of the
model .How much these variables affect the dependent variable which is the
GDP .The results tells that budget deficit and credit are the important factors and
they have a significance impact on the GDP .Model shows that fit is good .

CONCLUSION
THE author examine that gross domestic product and inflation is normally
distributed .They examine that there is no correlation between the dependent
variable GDP and independent variable inflation and investment .

The author examine that there exist a linear relationship between GDP budget
deficit and domestic credit .The results of the model tells that model is a good fit .

POLICY IMPLIMIATIONS
IN this paper the author tells that those variables which has negative impact on
the economic growth which one variable is the inflation which has a negative
impact on the economic growth .The author tells that the situation in which
inflation rate increases which increase the interest rate and interest rate is also
another variable which has a negative impact on the economic growth .

The author says that the government should take step to control the budget
deficit .They says that government of Pakistan should use those resources which
are underutilized .

This is the step which are used to reduce the problem of the budget deficit .The
author tells that another problem of the budget deficit is the cause of the
overprinting of the paper money due to increase the circulation of the money is
also the cause of the inflation .The author says that to control the budget deficit
government should increase the ratio of the direct taxes as well as the indirect
taxes .