An assessment of the relationship between budget deficit and economic growth in Namibia.

ABSTRACT

The study provides an assessment of the relationship between budget deficit and economic growth in Namibia using time series quarterly secondary data covering the period, 1993 Q4 to 2015, Q4. The study employs the Auto Regressive Distributed Lag (ARDL) bounds test and estimates the coefficients of the variables from the unrestricted error correction model in examining the relationship between budget deficit and economic growth. The KPSS unit root test results show that real GDP, debt and budget deficits are integrated of order zero, I (0), while investment is integrated of order one, I (1) making the highest order of integration I (1). The Toda Yamamoto Granger non-causality test results indicate evidence of bi-directional causality between real GDP growth and budget deficit and a unidirectional causality from real GDP growth to debt. The study also found a bi-directional causality between debt and budget deficit. Co-integration test results confirm a relationship between real GDP and the explanatory variables. The overall findings indicate that budget deficit negatively affects growth rate both in the short run and long run. This is in conformity with the neo-classical theory which holds that fiscal deficits lead to a fall in real GDP growth. Therefore, holding other variables constant, in the long run, an increase in the fiscal deficit by 1 percentage point of GDP is associated with a lower real GDP growth rate, by about 0.23 percentage points. The study therefore recommends that government expenditure be aligned with government revenue in Namibia to curb the budgetary gap.