The Relationship between Budget Deficit and Economic Growth in Vietnam

Abstract

The paper aims to elaborate the long-run relationship between budget deficit and other macroeconomic variables so as to investigate the impact of deficit on the economic development in Vietnam. The Autoregressive Distributed Lag (ARDL) approach is applied to analyze quarterly data from 2003Q1 to 2012Q4, which then concludes that there is a long-run causality running from budget deficit and government expenditures to economic growth. Budget deficit is found to have negative but insignificant effect on economic growth rate, which corresponds to Ricardian equivalence theory of no relationship between these two variables. Meanwhile, government expenditures have significant influence on economic growth; in which productive expenditures are proven to be positively related to economic growth and non-productive expenditures are detrimental to the growth of the economy. This result agrees with Rahman’s paper (2012) for Malaysia and is relevant to macroeconomic theories. Therefore, it is recommended that the government be really cautious in every spending decision in order to promote public investments’ efficiency, thus contribute to foster economic growth. In addition, it is found that the differences in classifying budget deficit create different short-run Granger causality among the variables.

Keywords: Budget Deficit, ARDL Approach, efficiency, government expenditure, economic growth