Do Budget Deficits Benefit or Harm Economic Growth? Evidence from African Countries Applying a Threshold Analysis

Economic expansion in recent years has been linked to a sharp increase in budget deficits. It is therefore imperative to cross-check their relationship. The study uses system GMM, quasi maximum likelihood, and bias-corrected dynamic panel estimator for estimation using panel data from 1996 to 2022. The findings show that budget deficits and economic growth have a statistically significant positive association. The study has determined a threshold value through a dynamic panel threshold model in gauging the effect of budget deficits on economic growth. The results indicate a single threshold impact that produced a threshold level of 14.3% thus confirming the prevalence of a non-linear relationship. The findings show that budget deficits significantly harm the upper regime on economic growth and show mean-reverting behavior over the threshold. The results recommend that governments expand their tax base for government revenue by prioritizing strengthening revenue authorities and reducing spending on recurrent budgets.