Investigating Factors behind Variations in Budget Deficit
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Date
2019-08-30
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UMT, Lahore
Abstract
Fiscal imbalances are one of the major economic concerns for both developed and developing countries. However, these imbalances are prevalent with a higher intensity in the developing
economies which are facing deficits as a key challenge along with many other economic issues. This study takes into consideration seven variables of macroeconomic and administrative nature, in order
to find out which factors majorly contribute to the variations in the budget deficits in case of 27 Asian countries covering the time period 2007-2017. The independent variables of the study include
government spending, trade barriers, soundness of banks, domestic market size, public trust on politicians, government effectiveness and political stability. Feasible Generalized Least Square
(FGLS) estimates show government spending and economic growth to be the most prominent factors leading to the betterment of budget balances. Trade barriers, government effectiveness and political
stability show the expected relationship with the dependent variable. However, the variable soundness of banks in the first model, shows an unexpected positive and insignificant impact on
budget deficits where deficits in the government budget increases with an increase in the soundness of banks, but in the second model, it shows the expected negative sign. The estimates for government
effectiveness and political stability show that the increase in the effectiveness of government authorities and stable political environment in the countries can help overcome the problem of budget
deficits in the set of selected countries. Moreover, public trust on politicians in the second model, obtained higher coefficient and relatively significant probability value indicting it to be helpful in
improving the overall balances in the government budget.