THE DYNAMICS OF BUDGET DEFICITS: GROWTH, GOVERNANCE, AND DEBT SUSTAINABILITY IN DEVELOPING ECONOMIES

Abstract

Persistent budget deficits have long characterized developing economies, raising concerns over macroeconomic stability, debt sustainability, and long-term growth prospects. While fiscal imbalances may at times be justified by countercyclical spending or development needs, their chronic persistence often reflects structural weaknesses and institutional constraints. This study empirically investigates the determinants of budget deficits across 40 developing countries during 2000–2020, applying a multi-theoretical framework that integrates macroeconomic, political, and institutional perspectives. Using panel data and econometric techniques, including generalized method of moments estimation, the analysis examines the impact of economic growth, inflation, external debt, terms of trade, tax revenue, political stability, corruption, and demographic trends on fiscal balances. The findings reveal that higher GDP growth, stronger tax revenue mobilization, and improved political stability significantly reduce budget deficits, whereas inflation, external debt, corruption, and population growth exacerbate fiscal imbalances. Results also confirm the dynamic persistence of deficits over time, with past imbalances strongly influencing future outcomes. These outcomes align with theoretical expectations of deficit–debt spirals, procyclical fiscal behavior, and institutional fragility in low- and middle-income countries. Policy implications emphasize the need for broadening tax bases, enhancing compliance, and adopting counter-cyclical fiscal rules, alongside governance reforms to curb corruption and improve institutional credibility. Containing inflation, managing external borrowing prudently, and addressing demographic pressures are equally critical for building fiscal resilience. By highlighting the interplay of structural, political, and economic factors, the study contributes to the literature on fiscal sustainability and provides evidence-based insights for policymakers in developing economies seeking to balance growth and stability.