Influence Of Budget Deficit On Economic Growth: The Case Of The Republic Of Macedonia

Year 2017, Issue: Temmuz 2017 (Özel Sayı), 116 - 126, 15.07.2017

Aleksandar Nikoloski Pece Nedanovski

https://doi.org/10.25095/mufad.402661

Cited By: 2

Abstract

Having a balanced budget is very important for achieving long-term and stable economic growth in everyone country.

Namely, the budget itself is a very powerful and useful tool and instrument for defining and realizing development policies in a

country. The usefulness and the efficiency of this instrument largely depend on whether it is balanced or in deficit. Structural budget

deficit cannot be analyzed if abstracted and separated because it influences large number of macroeconomic trends, but it is also

under influence of numerous macroeconomic factors. And fiscal factors, as structure of public expenditure, structure of public

revenue, government efficiency, level of tax avoidance and tax evasion, level of income and wealth inequality etc.

The stands of economic theory differ when it comes to the influence the budget deficit has on the economic growth of a

country. According to some theoreticians this link is positive; according to others it is inverse one whereas according to third party

of them there is a neutral connection between the budget deficit and the economic growth. The classic macroeconomic paradigm

perceived budget deficit as an enemy of the economy due to the line of negative effects it causes. However, in the course of time

governments accepted budget deficit as an instrument that can boost public investments which further lead to stimulating long-term

economic growth. Namely, when it comes to the stabilization policies of a country, the idea about budget deficit can be stressed out,

and the budget deficit representing a reflection of either the increase in public expenditure or the decrease of the distortive taxes, all

for the purpose of having the economy maintain its trend of a stable and long-term growth.

The causal connection between the deficit and the economic growth can be perceived through the fact that positive

economic growth generates additional public revenues. Therefore, the government is the one that should choose between cycle or

counter-cycle fiscal policy. Negative economic growth causes contraction in the economy, and as a result of this it is certain that the

expansive fiscal policy accompanied by large budget deficit is not appropriate in periods of economic growth.

Countries should make a rational use of their unused resources if they want to overcome the issues related to budget

deficit. Most often providing funds through indebting is not a good solution because it leads to increase in the public debt.

Consequently, governments often decide to increase the rates of direct and indirect taxes or to introduce a new form of tax that is

expected to increase the rates of public revenues and to reduce the budget deficit. The structure of fiscal policy should be

appropriately formulated so as to enable the taxpayers to bear certain tax burden, and the tax incentives to alleviate the issue of tax

evasion. The outcome of this all would be having higher tax income and lower budget deficit.

Economic growth has reversible influence on budget deficit. In fact, the best way to decrease budget deficit is to promote

economic growth. If economy is in progress, then it is real to expect increased tax revenues, without having the necessity to increase

tax rates. Therefore, boosting economic growth is the least painful way to decrease budget deficit. Having all that in mind,

governments should be careful when planning public revenues and expenditures i.e. when planning the budget deficit level, all for

the purpose of creating preconditions for reaching the aimed level of economic growth.

It is this paper’s aim to analyze the influence of budget deficit on the economic growth in the case of the Republic of

Macedonia. In the context of the appropriate econometric model, budget deficit is represented as a main independent variable, and

the gross domestic product as a dependent variable. Meanwhile, there shall be inspected what is the possible influence and how

significant it is and whether it is possible to be delivered in short or long term perspective. While testing the model, two basic tests

are used i.e. Breusch-Godfrey test for serial correlation and Breusch-Pagan-Godfrey test for heteroskedasticity. By making use of

the presented model there should be clarified what is the connection between public finance and economic growth in the Republ ic of

Macedonia as a potential EU member country. A significant prerequisite for doing so is having a detailed examination of whether

public finance provide basis that further contributes for short-term influence on economic performances thus boosting economic

growth.

Larger number of empirical research point out that the level of budget deficit of over 3% of the gross domestic product

leads to deceleration of economic growth. In cases when deficit is less than 1.5% of the GDP, it is neutral in respect to economic

growth. This statement is not valid for the case of the Republic of Macedonia, because in 2003 budget deficit totaled 4.1 % of the

GDP and at the same time the growth rate was 2.9% of the GDP. According to our findings, budget deficit should not be bigger

than 6% of GDP in order not to have negative effect on the economic growth. This is also supported with the constructed

econometric model, which simultaneously shows that much greater is the influence of other factors on the economic growth

compared to the budget deficit. The results of the model show that on a level of importance of 5%, the budget is positively correlated

with the GDP growth rate on a long-run. Decrease in budget deficit for 1% shall lead to increase in GDP growth rate for 0.35%.

The value of the determinant coefficient is relatively low (17.44%), which shows us the low influence budget deficit has on the

economy growth rate. Therefore, a conclusion can be drawn that by making use of fiscal policy a relevant influence can be made on

the economic growth in the long run.

Keywords

Economic growth, budget deficit, cause relation, Republic of Macedonia

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