An Examination of the Relationship between Budget Deficit and Economic Growth in Malawi

The research delved into the intricate relationship between budget deficits and economic growth in Malawi, using extensive annual time series data from 1980 to 2018. Employing advanced econometric techniques such as the Autoregressive Distributed Lag (ARDL) bounds testing approach and co-integration analysis, the study aimed to discern the nuanced long-term relationship between these variables. Additionally, the Toda-Yamamoto Granger causality test was deployed to investigate the causal links between budget deficits and economic growth. The findings revealed a consistent positive influence of budget deficits on economic growth, affirming the Keynesian theory, which posits that budget deficits stimulate the economy. Moreover, the Toda-Yamamoto causality test unveiled a unidirectional causal relationship, indicating that budget deficits significantly impact economic growth. In light of these results, the study recommends strategic measures. Specifically, the government should focus on expanding its revenue base, especially through enhanced taxation efforts, to ensure adequate funding for expenditures. Additionally, policymakers must work towards amplifying the multiplier effect to boost overall output and foster sustained economic growth. These recommendations underscore the pivotal role of fiscal policies in shaping Malawi's economic landscape and highlight the significance of prudent financial management for achieving lasting development goals.