Research using panel data in the period of
2007-2017 in Vietnam, GDP, CPI, FDI
and BD data are taken from the website
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
4. 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 2
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.
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Tạp chí Khoa học & Đào tạo Ngân hàng
Số 210- Tháng 11. 2019
© Học viện Ngân hàng
ISSN 1859 - 011X
Impact of budget deficit on growth:
A case study of Vietnam
Khanh Tuyet Nguyen Thanh Khac Hoai Le
Ngày nhận: 22/05/2019 Ngày nhận bản sửa: 16/06/2019 Ngày duyệt đăng: 27/08/2019
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
Ảnh hưởng của thâm hụt ngân sách đến tăng trưởng: Nghiên cứu trường hợp của Việt Nam
Tóm tắt: Nghiên cứu này xem xét mức độ ảnh hưởng của thâm hụt ngân sách đến tăng trưởng kinh tế ở Việt
Nam trong giai đoạn 2007-2017. Với hồi quy dữ liệu bảng, biến phụ thuộc là tăng trưởng kinh tế (GDP), các
biến độc lập bao gồm chỉ số giá tiêu dùng (CPI), đầu tư trực tiếp nước ngoài (FDI) và thâm hụt ngân sách (BD),
kết quả cho thấy trong khung thời gian nghiên cứu, thâm hụt ngân sách có mối tương quan dương với tăng
trưởng kinh tế ở mức có ý nghĩa thống kê, trong khi không có mối tương quan đáng kể nào được tìm thấy
giữa CPI và 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
1. Introduction
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
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
Faculty of Economics and Tourism, Quang Binh University
KHANH TUYET NGUYEN - THANH KHAC HOAI LE
27Số 210- Tháng 11. 2019- Tạp chí Khoa học & Đào tạo Ngân hàng
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 2012-
2016 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 do 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.
2. 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
Figure 1. GDP Growth and Budget Deficit in Vietnam from 2007 to 2017
Source: https://countryeconomy.com
Impact of budget deficit on growth: A case study of Vietnam
28 Tạp chí Khoa học & Đào tạo Ngân hàng- Số 210- Tháng 11. 2019
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
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 time-
series 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
KHANH TUYET NGUYEN - THANH KHAC HOAI LE
29Số 210- Tháng 11. 2019- Tạp chí Khoa học & Đào tạo Ngân hàng
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 1. Independent variables definition
Variable Author Explanation Unit Expectation
BD
Ahmad (2013)
Dang Van Cuong & Pham Le
Truc Quynh (2015)
Budget deficit (budget income <
budget expenditure) M.$ -
CPI Huynh The Nguyen & Nguyen Le Ha Thanh Na (2015) Consumer Price Index % -
FDI Ahmad (2013) Foreign Direct Investment M.$ +
Impact of budget deficit on growth: A case study of Vietnam
30 Tạp chí Khoa học & Đào tạo Ngân hàng- Số 210- Tháng 11. 2019
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
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.
3. 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
Figure 2. GDP of Vietnam in the 2007 – 2017 period
Source: https://countryeconomy.com
KHANH TUYET NGUYEN - THANH KHAC HOAI LE
31Số 210- Tháng 11. 2019- Tạp chí Khoa học & Đào tạo Ngân hàng
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
4. 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 2
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
Table 2. Matrix of correlation coefficient
lnGDP lnFDI lnBC CPI
lnGDP 1.0000
lnFDI -0.0353 1.0000
lnBC 0.7236 -0.4237 1.0000
CPI -0.5779 0.3100 -0.8610 1.0000
Table 3. Regression results of variables in the model
Source SS df MS Number of obs = 11
Model 1.01517961 3 .33839320 F(3, 7) 3.96
Residual .598673531 7 .08552479 Prob > F = 0.0410
Total 1.61385314 10 R-squared = 0.6290
Adj R-squared = 0.4701
Root MSE = .29245
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
Impact of budget deficit on growth: A case study of Vietnam
32 Tạp chí Khoa học & Đào tạo Ngân hàng- Số 210- Tháng 11. 2019
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 3 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
Tài liệu tham khảo
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positive correlation with GDP.
Prob (F) value in the model is 0.0410
(<5%) shows that there is a linear
relationship between dependent variable
GDP and independent variables CPI, FDI
and BD. Thus, the given linear regression
model is appropriate.
The R2 coefficient is 0.4701, indicating
that the variation of the independent
variable has a relatively high effect on the
dependent variable with 47.01% level of
influence and is statistically significant.
This also indicates that there are also
many other independent variables not
included in the model that explain the
dependent variable.
There is a statistically significant
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56 Tạp chí Khoa học & Đào tạo Ngân hàng- Số 210- Tháng 11. 2019
giới và trong nước, từ đó xác định chiến
lược đúng đắn trong lựa chọn mô hình
phân phối ■
nghiệp có ý định triển khai bán lẻ Ebook
nói riêng, các sản phẩm nội dung số khác,
để thành công cần tìm hiểu và đánh giá rõ
xu hướng phát triển Ebook chung trên thế
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Nam, Tạp chí khoa học và đào tạo ngân hàng, số 203, tr.63-75.
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benefits.htm
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22. www.waka.vn, mục Toàn cảnh waka, Các báo cáo thị trường sách điện tử, https://waka.vn/bao-cao-thi-truong-
sach-dien-tu
relationship between budget deficit and
economic growth (P.value <10%) with a
positive impact coefficient (β = 0.396).
The coefficient means that when the
budget deficit increases by 1 unit, GDP
will increase by 0.396 times. Consumer
price index (CPI) and foreign direct
tiếp theo trang 32
investment (FDI) have no statistically
significant impact on economic growth.
In conclusion, 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.
■
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