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<p>Economic expansion in recent years has been associated with a significant increase in budget deficits. It is, therefore, imperative to examine their relationship given the contradiction of the effect of budget deficits on economic growth. The study demonstrates that the Keynesian hypothesis holds for the case of African countries, utilising dynamic models such as system GMM, quasi-maximum likelihood estimator, and bias-corrected with data from 1996 to 2022. The findings display that budget deficits and economic growth have a significant positive association in the short run. Moreover, control variables, such as the real interest rate, terms of trade, and general government debt, have been shown to exhibit a negative relationship with economic growth, except for foreign direct investment. The results indicate a single threshold level of 14.3%, which confirms the prevalence of a nonlinear relationship and demonstrates a mean-reverting behaviour over the threshold amount. It is concluded that budget deficits affect economic growth positively and beyond the threshold value negatively. Governments should expand their tax base for government revenue by prioritising strengthening revenue authorities and reducing government spending or recurrent budgets. African governments should continue to develop a political and economic environment that attracts more foreign direct investment.</p>

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Do budget deficits benefit or harm economic growth? Evidence from African countries using a threshold analysis

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  • 发表日期：

    2025年12月11日

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  • Samwel Mwigeka

摘要

Economic expansion in recent years has been associated with a significant increase in budget deficits. It is, therefore, imperative to examine their relationship given the contradiction of the effect of budget deficits on economic growth. The study demonstrates that the Keynesian hypothesis holds for the case of African countries, utilising dynamic models such as system GMM, quasi-maximum likelihood estimator, and bias-corrected with data from 1996 to 2022. The findings display that budget deficits and economic growth have a significant positive association in the short run. Moreover, control variables, such as the real interest rate, terms of trade, and general government debt, have been shown to exhibit a negative relationship with economic growth, except for foreign direct investment. The results indicate a single threshold level of 14.3%, which confirms the prevalence of a nonlinear relationship and demonstrates a mean-reverting behaviour over the threshold amount. It is concluded that budget deficits affect economic growth positively and beyond the threshold value negatively. Governments should expand their tax base for government revenue by prioritising strengthening revenue authorities and reducing government spending or recurrent budgets. African governments should continue to develop a political and economic environment that attracts more foreign direct investment.