BUDGET DEFICIT AND ECONOMIC GROWTH: A COMPARATIVE STUDY BETWEEN BANGLADESH AND SRI LANKA

Abstract

Bangladesh and Sri Lanka are consistently facing budget deficit problems since independence. This study used secondary quantitative time series data of two different period datasets from 1982 to 2020 for Bangladesh and from 1990 to 2020 for Sri Lanka. All datasets are collected from the international monetary fund. This study explores the impact of budget deficits on the economic growth of Bangladesh and Sri Lanka, respectively. We select budget deficit as a percentage of the gross domestic product as the independent variable and economic growth rate as the dependent variables for both country analyses. Development and economic progress are difficult to define. Growth is more than just increased GDP or infrastructural development. Different schools of thinking explain story differently. In traditional political economy, growth rivals development. Neoclassical and Keynesians likewise emphasize growth for economic success. Marxists, radicals, and Neo-Marxists criticise capitalism progress. Later, Amartya Sen and others emphasised well-being, competence, and endowments. Economic growth is tied to fiscal policy. Macroeconomic analysis of growth is needed to examine the budget deficit and economic growth. The underpinning background theories of this study are Keynesian theory, Ricardian equivalence theory, Hirschman disequilibrium theory, Rostow’s growth stage model, and Dependence theory of economics. The study selects two models for two countries based on unit root test output. The study used summary statistics, correlation matrix, unit root test, lag selection criteria, autocorrelation test, heteroscedasticity test, etc. The applied model for Bangladesh data was the vector error correction model (VECM), and that for Sri Lanka was autoregressive distributed lag (ARDL). Statistical tools validated most of the statistical findings. Bangladesh's budget deficit hurts economic growth, whereas Sri Lanka's does not. Two datasets had different outcomes. Both results support Keynesian theory. This analysis determined Sri Lanka's budget deficit is positive and Bangladesh's is not a harbinger.