The Relationship between Budget Deficit and Economic Growth of Pakistan

Abstract

This study examine the impact of budget deficit on economic growth in Pakistan during the period from 1976-2007. Co integration technique, VAR Granger Causality test and vector error correction model is used. Economic growth was measured as growth in GDP. The technique of time series econometrics such as Granger Causality, Johansen co integration and error correction models has been used. Johansen co integration shows that all variables are co integrated and error correction term is also significant. However we have not found any significant impact of budget deficit on economic growth of Pakistan. The results showed that GDP cause investment and investment cause deficit. However budget deficit does not cause GDP growth. The results of this study also support Keynesian view about budget deficit. The findings also show that the budget deficit has a positive impact on the growth.

Keywords: Budget Deficit, Economic Growth