Abstract

Theory and empirical findings are still unclear on the relationship between fiscal deficit and other macroeconomic variables to date. Using Malawi as a case study, this study examined the impact of fiscal deficit on economic growth. The investigation relates to arguments from 3 main schools of thought (New Keynesian, Neoclassical, and Ricardian equivalence) on the impact of fiscal deficit on economic growth. This study estimates the relationship by running Autoregressive Distributed Lag Model (ARDL) on time series annual data from 1980 to 2020. The results of the ARDL bounds test suggest that long run cointegration exists between the macroeconomic variables and economic growth. In addition, the results of ECM also reveal that the variables have a joint causal effect on economic growth. In conclusion, the study has found that the impact of fiscal deficit on economic growth depends on the time horizon. In short-term, medium-term, and long-term, fiscal deficit affects macroeconomic variables differently. Therefore, the study recommends adopting and implementing fiscal policies that could put the economy on a sustained path of growth and development from the short-term to long term. However, the study has not incorporated corruption and politics, which play a vital role in the economy and affect the increased government expenditure due to heterogeneity and conflict of interests between policymakers and voters. Therefore, further studies should look at disaggregating fiscal data according to changes in political leadership and establishing an optimal level of fiscal deficit at which, beyond that level, the fiscal deficit starts becoming detrimental to economic growth in the long-run.

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School	: School of Law, Economics and Government
Issued Date	: 2023

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