The Relationship between Budget Deficit , Public Debt and Economic Growth in Jordan during the Period (1990-2018)

Abstract

The main goal of the present study is to analyze the relationship between the budget deficit and the growth of public debt. It also aims at showing the contribution of the current and capital expenditures of the central government on the increase in public debt and economic growth in Jordan during the period (1990-2018). The results of Bounds Test show that there is long-run relationship between budget deficit and public debt. The causality  test indicates that there is a unidirectional causality from budget deficit to public debt in the long-run.Using the autoregressive distributed lag (ARDL) methodology, the study found that the budget deficit has a significant effect on the public debt, which suggests that the government total revenues failed to cover the increasing governmental expenditures. As a result, the budget deficit increases in Jordan and the use of borrowing arises so as to cover the current expenditures.

Using the FMOLS methodology, the study found that the change on the rate of public debt is more sensitive to current expenditures than to capital expenditures. Moreover, elasticity of economic growth for current expenditure is higher than than its elasticity for capital spending..

The study recommended the need to focus on the capital expenditures more than on the current expenditures and public consumption to sustain financing the budget deficit at the national level. In order for debt to be sustainable in the long term, the study recommended that current spending be financed through government revenues, that it be subject to economic feasibility standards, and that unnecessary spending be limited, while public investment should be financed through borrowing.