Fiscal Policy and Government Debt Introduction The topic for the study is the impact of fiscal policy and government debt on the economic growth of an economy. This topic has been chosen owing to the fact that fiscal policy and government debts are subjected to several debates in the contemporary world. At the same time, fiscal policy and government debts are also identified to have considerable implication on the economic condition of a country. Over the years, the global economic environment has constantly faced with radical challenges, which have significantly influenced the ability of the nations across the world to sustain the level of competitiveness1.
In order to address the challenges as well as to remain competitive and attain stable GDP growth rate, countries have been involved in using the macroeconomic tool such as fiscal policy to cope up with the existing and the emerging economic challenges. Notably, it has been argued that fiscal policy offers the economist of the countries with an effective tool that enables the countries to overcome the challenges imposed by the sluggish economic growth and economic uncertainties as witnessed during economic recession.
Likewise, government debt is considered to have severe impact on the GDP growth rate of an economy and at the same time, it has been subjected to several contentions and controversies2. In this regard, many economists have argued that government debt is an effective tool that paves a way for attaining success and prosperity of a nation in the long run. On the other hand, the detractors of the government debts have strongly argued that government debts merely increase the burden for a country in the future and at the same time’ these debts have minimum impact on securing prosperous nation3.
In order to validate the various debates regarding the positive and negative implication of fiscal policy and government debts, hypothesis has been formulated with dependent variable ‘Tax cut and increased government debt’ and independent variable ‘economic condition’. The hypothesis is reflected below: H0: The tax cut and increased government debt secure a prosperous economic condition for the future generation H1: The tax cut and increased government debt do not secure a prosperous economic condition for the future generation The specific equation based on OLS model is provided hereunder. ∑Yi – (Xi)2 Yi is the actual value Xi is the predicted value OLS Equation: Must take the form of: DEF/GDPit=A + PRIRE/GDPit +cDUMit + d(DUM)()PRIRE/GDP)it +e it i=1……. .N; t= 1……. T The above-documented equation intends to establish the relationships between the tax cut and government debt with a percentage of GDP.
Wherein, I = year, and t is denoted as (DEF/GDPit) to the value of government expenditure (as a percentage of GDP), corresponding to the same year – denoted as (PRIRE/GDP)it. Dependent Variable Y: GDP at market prices Independent Variable YG: Growth rate per GDP per capita Y0: Initial GDP at market price GEGE: General expenditure of government on education GEGH: General expenditure of government on health GEGOHC: General expenditure of government on Housing and Community amenities GEGOEP: General expenditure of government on Environment Protection GEGPOS: General expenditure of government on Public Order and Safety Data Source(s) of data and variable definitions The data necessary for conducting the research were collected from the secondary sources.
In this regard, the observation method was applied. Notably, the data pertaining to deficits, spending as well as tax along with the growth in 100 countries across the world were obtained.
The data gathered from the source provided relevant information regarding the research subject matter. The data reflecting the macroeconomic condition of a country were primary collected for the research study. Data Manipulations Required Before Estimation The data were gathered from the 100 different countries revealed few interesting facts. The data presented the percentage of variable of the countries. Correspondingly, the variables that were taken into the consideration for the accomplishment of the research goals are mentioned above.
Accordingly, it can be determined that there are numerous independent variables as the fiscal policy and government are ascertained to have significant impact on the above stated independent variables. Economic Model Consumption Function Ct= α0 + α1 Yt Import Function Mt= β0 + β 1Yt Identity Equation Yt=Ct+It+Gt+Et-Xt t= 1,2,…100 Econometric Model Ct= α0 + α1 Yt +U 1t Mt= β0 + β 1 Yt +U 2t Yt=Ct+It+Gt+Et-Xt Where, Ut is an error term t= 1,2,…, 100 Critical Assessment of Data Table 1 illustrates the descriptive statistics of the variables that were used in the estimation of the anticipated outcome of the data gathered from the 100 countries across the world.
According to the data obtained from the descriptive statistics, it has been observed that per capita income (YG) grew at about 2.2% per annum. In addition, it has been further determined from the analysis of the statistics that spending of the government on public health (GEGH) is 5.840. In addition, it has been observed that Initial GDP at market price (Y0) was 18209.75. General expenditure of government on Environment Protection (GEGOEP) grew at 0.629. General expenditure of government on Public Order and Safety (GEGPOS) was reckoned 1.476.
The study enabled a critical evaluation of the impact on fiscal policy and government debt on the growth and prosperity of a country. Accordingly, the descriptive statistics revealed that there are lagged impact of the fiscal policy on the growth and prosperity of a country. The study revealed that a country with strong financial position has greater possibility of attaining growth and prosperity. On the other hand, financial instability and increased government debt have minimum opportunity to secure prosperity of a country. Fig: 1Mean Fig: 2 Standard Deviation Tables 1 Variable Mean Std Deviation Minimum Maximum YG: 2.191 2.236 -6.968 13.28 Y0 18209.8 5976.567 8000 29800 GEGE: 5.529 1.284 2.5 8.2 GEGH: 5.84 1.288 0.9 7.7 GEGOHC: 0.933 0.584 0.1 6.3 GEGOEP: 0.629 0.288 0.1 1.5 GEGPOS: 1.476 0.495 0.001 2.8 References Klaus Adam, "Government Debt and Optimal Monetary and Fiscal Policy. " (Mannheim University and CEPR, 2010), 2-29. Salim Furth, “Stimulus or Austerity? " Fiscal policy in the Great Recession and European Debt Crisis.
(Heritage Foundation, 2014), 40-63. William Easterly, "Fiscal Policy and Economic Grouth: An Empirical Investigation. " deu. edu. October. Accessed September 24, 2014. http: //kisi. deu. edu. tr/yesim. kustepeli/w4499.pdf.