Impact of budget deficit on growth: A case study of Vietnam

This study examines the extent to which budget deficit affects economic growth in Vietnam in the 2007-2017 period. Using the panel data regression, where the dependent variable is the economic growth (GDP), independent variables include consumer price index (CPI), foreign direct investment (FDI) and budget deficit (BD), the results show that during the research time frame, budget deficit has a positive correlation with economic growth at a statistically significant level, while no significant correlation is found between CPI and FDI with the dependent variable.

Impact of budget deficit on growth: A case study of Vietnam Khanh Tuyet Nguyen Thanh Khac Hoai Le Faculty of Economics and Tourism, Quang Binh University This study examines the extent to which budget deficit affects economic growth in Vietnam in the 2007-2017 period Using the panel data regression, where the dependent variable is the economic growth (GDP), independent variables include consumer price index (CPI), foreign direct investment (FDI) and budget deficit (BD), the results show that during the research time frame, budget deficit has a positive correlation with economic growth at a statistically significant level, while no significant correlation is found between CPI and FDI with the dependent variable Keywords: Budget deficit, Growth, Vietnam Economy Introduction state budget deficit which is an extremely sensitive issue, especially in developing countries like Vietnam In the context of global economy with big changes such as increasing oil and gasoline prices, financial crisis in the US, high inflation Vietnam and many other countries have been facing numerous issues and instability that have a great impact on the macro economy One of the issues is a Ảnh hưởng thâm hụt ngân sách đến tăng trưởng: Nghiên cứu trường hợp Việt Nam Tóm tắt: Nghiên cứu xem xét mức độ ảnh hưởng thâm hụt ngân sách đến tăng trưởng kinh tế Việt Nam giai đoạn 2007-2017 Với hồi quy liệu bảng, biến phụ thuộc tăng trưởng kinh tế (GDP), biến độc lập bao gồm số giá tiêu dùng (CPI), đầu tư trực tiếp nước (FDI) thâm hụt ngân sách (BD), kết cho thấy khung thời gian nghiên cứu, thâm hụt ngân sách có mối tương quan dương với tăng trưởng kinh tế mức có ý nghĩa thống kê, khơng có mối tương quan đáng kể tìm thấy CPI FDI với biến phụ thuộc Từ khóa: thâm hụt ngân sách, tăng trưởng, kinh tế Việt Nam Nguyễn Tuyết Khanh Email: tuyetkhanh1203@gmail.com Lê Khắc Hoài Thanh Email: hoaithanhlk89@gmail.com Khoa Kinh tế- Du lịch, Đại học Quảng Bình Ngày nhận: 22/05/2019 Tạp chí Khoa học & Đào tạo Ngân hàng Số 210- Tháng 11 2019 Ngày nhận sửa: 16/06/2019 26 Ngày duyệt đăng: 27/08/2019 © Học viện Ngân hàng ISSN 1859 - 011X KHANH TUYET NGUYEN - THANH KHAC HOAI LE Figure GDP Growth and Budget Deficit in Vietnam from 2007 to 2017 Source: https://countryeconomy.com rates , finding solutions to adjust a state budget deficit is urgent and necessary In Vietnam, the level of budget deficit is increasing and negatively affecting people’s living standard as well as the national economy In recent years, Vietnam’s economy has been facing many uncertainties Although during the period 2007-2017 the GDP showed a positive trend, it grew at unstable rate, while budget deficit also sharply increased, especially in the 20122016 period (Figure 1) While studying the causes of these uncertainties, we have found that besides the external impacts of the 2008 global financial and economic crisis, there are other reasons that need to be mentioned: (i) ineffective fiscal management, e.g budget calculation methods that not follow the international practices; (ii) inadequate process of managing and allocating public expenditures, (iii) raising government budget ineffectively Within the research scope, the study gives an overview of Vietnam’s budget deficit since 2007 to provide a comprehensive view on economic growth and the budget deficit in relation to the growth in both theoretical and practical perspectives Literature review Experimental studies on the relationship between budget deficit and economic growth also give many heterogeneous results According to Al-Khedair (1997), interest rate increases in the short run due to budget deficit, but in the long run that impact has not been explored Al-Khedair used the VAR model by selecting a data of G-7 countries for the period 1964-1993 to observe the relationship between budget deficit and economic growth While he also discovered that the deficit negatively affects the trade balance, it has a positive and significant impact on the economic growth of those countries World Economic Outlook (IMF, 1996) concluded that during the mid-1980s the group of developing countries had a higher financial imbalance and lower economic growth than countries with low or medium Số 210- Tháng 11 2019- Tạp chí Khoa học & Đào tạo Ngân hàng 27 Impact of budget deficit on growth: A case study of Vietnam budget deficit Shojai (1999) argued that the budget deficit financed by the Central Bank could also lead to inefficiencies in the financial market and cause high inflation in developing countries while negatively impacting the nation’s real exchange rates and interest rate, thus reducing the nation’s competitiveness Few studies further support the impact of budget deficit on investment, exchange rate, and real interest rate Bahmani (1999) investigated the long-run relationship between the U.S federal real budget deficit and real fixed investment using quarterly data over the 1947I– 1992II period The methodology was based on the Johansen-Juselius cointegration technique The results reveal that there are three cointegrating vectors among investment, income, interest rate, and the budget deficits The estimates of these cointegrating vectors and further analysis show that a cointegrating vector in which all four variables carry their expected signs support the Keynesian view that in the long run the U.S real federal deficit crowds-in real investment Gulcan and Bilman (2005) investigated the effect of budget deficit reduction on exchange rate between US dollar and Turkish lira using cointegration methods for the period 1960 to 2003 The research shows that the budget deficit is very important in maintaining the real exchange rate They argued that the Government must focus on stabilizing the budget because the trade balance is significantly affected by the real exchange rate and has an impact on economic growth There are studies that have found positive significant relations between budget 28 deficit and growth in both developing and developed countries (IMF 1996), while other studies have found the inverse relationship (Karras, 1994) Lozano (2008) collected quarterly data of last 25 years (1983-2007) and using Vector Error Correction (VEC) model explored a mixed relationship of inflation and money growth with fiscal deficit Vuyyuri & Seshaiah (2004) studied the interaction of budget deficit in India with other macroeconomic variables such as Nominal effective exchange rate, GDP, Consumer Price Index and money supply (M3) giving special emphasis on the budget deficit-exchange rate relationship using Cointegration approach and VECM for the period 1970-2002 The results reveal that the variables under study are cointegrated and there is a bi-directional causality between budget deficit and nominal effective exchange rates However, no significant relationship between budget deficit and GDP, Money supply & consumer price index have been found Fatima et.al (2012) investigated the true impact of the budget deficit on the economic growth of Pakistan The sample taken for the study was comprised of timeseries during the period of 1978-2009 The regression analysis was conducted to ascertain the impact of BD on the GDP, and explored a negative impact of budget deficit on the economic growth Huynh (2007) conducted his study while collecting data from the developing Asian Countries for the period of 1990 to 2006 He concluded that there is a negative impact of the budget deficit on the GDP growth of those the countries while simply analyzing the trends in Vietnam Haider et.al (2016) investigated the true impact of a budget deficit on GDP growth As Tạp chí Khoa học & Đào tạo Ngân hàng- Số 210- Tháng 11 2019 KHANH TUYET NGUYEN - THANH KHAC HOAI LE employment rate, exchange rate, interest rate, and inflation also cause an impact on GDP, these variables were considered as control variables along with the budget deficit The quarterly data of the variables were taken from the period of 2000-2012 Different statistical tests and models (i.e Unit root test, VAR, Granger Causality) were used to find out the impact of budget deficit on GDP growth For short run adjustment and co-integrating relation measurement, VEC method was also applied Both VAR and VEC models were tested based on their stability tests The results of the research suggest that, there are co-integrating relationships among budget deficit, inflation and exchange rate and there is a negative impact of budget deficit on GDP growth The relationship between budget deficit and economic growth has been studied by many scholars in Vietnam Van, V B., & Sudhipongpracha, T (2015) assessed the probability of such claims for the Vietnamese government’s fiscal policy between 1989 and 2011 After the introduction of the Doi Moi reform policy in the late 1990s, Vietnam has witnessed high economic growth Yet, its government’s deficit pattern is among the highest in Southeast Asia The findings demonstrated that in the case of Vietnam, government deficits had no direct effects on the country’s economic productivity between 1989 and 2011 Instead, the article discovered that foreign direct investment (FDI) played an important role in Vietnam’s economic productivity over the same period, while real interest rates adversely affected the growth This article concludes that rather than expanding public sector through government spending deficit, Vietnam requires administrative and regulatory reforms to ensure an efficient use of government resources, a continuous flow of foreign capital, and consistent economic growth Huynh The Nguyen & Nguyen Le Ha Thanh Na (2015), examined the relationship between budget deficit and economic growth in Vietnam using VAR model The model used secondary data series, including a time series of data from 1990 to 2012 Data was collected from Asian Development Bank including annual economic growth (GDP), government investment (GI), exchange rate (REX), budget deficit (BD) and real interest rate (RIR); from the IMF including real annual growth data (GDP), consumer price index (CPI) In the model, the variables before analysis were processed logarithm transformation to estimate the determination of variation between 1990 and 2012 Research results show that budget deficit has no clear relationship with economic growth, however, government investment is causal with budget deficit and economic growth Table Independent variables definition Variable BD CPI FDI Author Explanation Ahmad (2013) Budget deficit (budget income < Dang Van Cuong & Pham Le budget expenditure) Truc Quynh (2015) Huynh The Nguyen & Nguyen Consumer Price Index Le Ha Thanh Na (2015) Ahmad (2013) Foreign Direct Investment Unit Expectation M.$ - % - M.$ + Số 210- Tháng 11 2019- Tạp chí Khoa học & Đào tạo Ngân hàng 29 Impact of budget deficit on growth: A case study of Vietnam Figure GDP of Vietnam in the 2007 – 2017 period Source: https://countryeconomy.com Therefore, to achieve a stable growth in the coming time, the government should implement and control the investment flows as well as effectively manage budget deficit Dang Van Cuong & Pham Le Truc Quynh (2015) studied the impact of budget deficit on economic growth in some Southeast Asian countries using additional factors: inflation, foreign investment and credit of private sector To evaluate the regression coefficients of the variables in the model, the authors used a fixed effect model and general least squares method (GLS) for panel data from 2001-2013 Experimental results show that budget deficit, credit in the private sector negatively impact economic growth, foreign investment positively affects economic growth, while inflation is not statistically significant Su Dinh Thanh (2012) investigated the relation between budget deficit and inflation in Vietnam through an empirical study, a model proposed as following: LP = F (BC, M2, GDP, TOP) LP represents the consumer price index; BC is the budget deficit; M2 is money supply and TOP is trade openness measured through total export/GDP target The results 30 suggest that the budget deficit has no relationship with long-term inflation, but the impact is statistically significant to short-term inflation Money supply has a positive impact on inflation in short and long term But the effect of money supply on inflation in the short term is smaller than in the long term Trade openness effect is negatively related to inflation in the short and long term Economic growth has a negative impact on inflation in the short and long terms Data and variables The objective of this paper is to understand the impact of the budget deficit on Vietnam’s economic growth in the 2007-2017 period with the dependent variables of economic growth The model is as follows: GDPt = α + β1X1t + β2X2t + … + βtXnt + µ Where: GDP is a dependent variable, measured by the annual GDP per capital in US dollars and taken from year-end data X1, X2, …, Xn are independent variables T: Time series, 11 years data from 2007 to 2017 Tạp chí Khoa học & Đào tạo Ngân hàng- Số 210- Tháng 11 2019 KHANH TUYET NGUYEN - THANH KHAC HOAI LE Table Matrix of correlation coefficient lnGDP lnFDI lnBC lnGDP 1.0000 lnFDI -0.0353 1.0000 lnBC 0.7236 -0.4237 1.0000 CPI -0.5779 0.3100 -0.8610 CPI 1.0000 Table Regression results of variables in the model Source SS df MS Number of obs = 11 Model 1.01517961 33839320 F(3, 7) Residual 598673531 08552479 Prob > F = 0.0410 1.61385314 10 R-squared = 0.6290 Adj R-squared = 0.4701 = 29245 Total Root MSE 3.96 lngdp Coef Std Err t P> | t | [95% Conf Interval] lnfdi 329887 2431645 1.36 0.217 -.2451058 9048797 lnbc 396506 1749629 2.27 0.058 -0.172156 8102275 cpi 0147279 0270525 0.54 0.603 -0.049241 0786969 _cons 3.607227 5.321968 0.68 0.520 -8.977226 16.19168 Research using panel data in the period of 2007-2017 in Vietnam, GDP, CPI, FDI and BD data are taken from the website https://countryeconomy.com/; Data is processed by Stata software The study uses ordinary least squares (OLS) to conduct analysis In the model, the variables before analysis were processed logarithm transformation to estimate the determination of variation between 2007 and 2017 The model is as follows: GDP= α + β1(BD) + β2(FDI) + β3(CPI) + µ Results and discussions 4.1 Overview of Vietnam’s economic growth in the 2007-2017 period After 10 years of becoming a member of WTO (2007-2017), despite being affected by the global financial crisis and the public debt crisis, Vietnam still maintains an average growth rate of 6,29% per year, except for 2009 at only 5.3% Figure shows that GDP tends to increase steadily over the years, from 77,520m USD in 2007 to 220,376m in 2017 (an increase of 2.8 times), indicating a relatively high growth rate The high growth rate is due to improving labor productivity and national competitiveness However, it is mainly relying on the inputs (capital, labor) and expanding investment, for example: public investment (through monetary and fiscal policy) and credit expansion through loosen monetary policy 4.2 Budget deficit in Vietnam Số 210- Tháng 11 2019- Tạp chí Khoa học & Đào tạo Ngân hàng 31 Impact of budget deficit on growth: A case study of Vietnam The budget deficit in Vietnam in the 2007-2017 period fluctuated continuously The proportion of budget deficit in Vietnam is always above 5.5% of GDP, except for 2008 when the budget deficit was at 0.49%, and tends to be unstable and slowly decreasing According to international practices, under normal conditions the budget deficit accounting for 3% of GDP is considered to be concerning, while the level of 5.5% of GDP is serious 4.3 Results of empirical research The results in Table show the correlation relationship between dependent variable and independent variables FDI and CPI have a negative correlation with GDP, while the budget deficit (BD) has a positive correlation with GDP Prob (F) value in the model is 0.0410 (