Analysis of Budget Deficit and its Structural Determinants in Ethiopia

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Addis Ababa University


Immediately following he ecl r ion of socialism in he coun try in 1975 , b o th governmen revenue an ex en i ure inc r eased substantially . Nevertheless , the grow h of government expendi ture was not matched by growth of revenue hence persistent and large budget deficits b ecame the feature of Ethi opian economy . In the face o f growing budget deficits the military government made no attempt to control its expenditure but relied up on continuous increase in tax rates, introduction of new taxes and manipulation of t h e ceilings imposed on government borrowing from domesti c sources . Th i s study examined whether the structural factors hypoth e si sed by Morrison (1982) are responsible f or the growing b udget d e fi ci t . The es t imated regression results show that in the l on g r un government budget deficits is likely to increase the higher i s t h e degree of government involvement in the economy the l ess exercise control over expendi ture, the hi gher i s revenue instabili ty and the lower is growt h in government revenue. However, the hypothesis that budget deficit decrea ses as economy grows is not supported . In the short run i t ~ s only growth in governmen t revenue tha t is found to explain the deficits . Al though the recent p oli cy of the Transi tional Government of Ethi opia planned to decrease the b udget defi ci ts , this objecti ve was not attained due to the reduction in tax rates . \ Moreover , the introduction of the regional adminstration led to the duplicati ons of government bureaucracy thereby pushing up the expenditure level.



Analysis of Budget Deficit, Structural Determinants