Analysis of Budget Deficit and its Structural Determinants in Ethiopia
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Date
1996-06
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Addis Ababa University
Abstract
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.
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Keywords
Analysis of Budget Deficit, Structural Determinants