Is the Fiscal Deficit of ASEAN Alarming? Evidence from Fiscal Deficit Consequences and Contribution towards Sustainable Economic Growth

Maran Marimuthu, Hanana Khan and Romana Bangash
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Maran Marimuthu: Department of Management and Humanities, Universiti Teknologi PETRONAS, Seri Iskandar 32610, Malaysia
Hanana Khan: Department of Management and Humanities, Universiti Teknologi PETRONAS, Seri Iskandar 32610, Malaysia
Romana Bangash: Institute of Management Sciences (IM|Sciences), Peshawar 25000, Pakistan

Sustainability, 2021, vol. 13, issue 18, 1-19

Abstract: The Association of Southeast Asian Nations (ASEAN) has faced a persistent fiscal deficit for the last three decades. In the vast literature, a question is still arising: is ASEAN’s fiscal deficit alarming? This study explores the fiscal deficit with different perspectives to provide guidelines for policymakers to answer this question. For this purpose, we offer fiscal causal hypotheses estimates, including the contribution of Government expenditures (GEs) and Government revenues (GRs) towards sustainable economic growth; we then evaluated two additional deficit hypotheses, the impact of fiscal deficit and deficit financing on inflation. This empirical analysis covered annual financial data for the years 1990 to 2019 of ten member countries of ASEAN by applying panel econometric techniques, which include unit root Levin, Lin, and Chu (LLC) and Im, Pesaran, and Shin (IPS) tests; the panel autoregressive distributed lag (ARDL) model for cointegration; and the Dumitrescu–Hurlin (DH) test for causality. The findings revealed that government expenditures contribute more towards sustainable economic growth while government revenues are inversely related to growth in the long run. The DH causality test supported the fiscal synchronization hypothesis and current account targeting hypothesis in ASEAN. The interest rate is found as a moderator between fiscal and current account deficits. Furthermore, the findings showed that the fiscal deficit of ASEAN could generate inflation while relying on outstanding debt. Overall, our findings concluded that the fiscal deficit of ASEAN is alarming based on the behavior of government revenues, interest rate dynamics, political stability, and outstanding debt in deficit financing.

Keywords: fiscal and current account deficits; twin deficit hypotheses; fiscal causal hypotheses; sustainable economic growth; inflation; panel unit root; panel cointegration; panel DH causality (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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