On bringing down Egypt's budget deficit to GDP ratio: are expenditure cuts required?

Abstract

It is a common argument for a developing country like Egypt that the adoption of a contractionary fiscal policy that aims at reducing the level of government expenditure and its various components is necessary to lower the budget deficit as a percentage of GDP. However, such an argument can be flawed due to the fact that changes in the government expenditure might lead to unexpected changes in both the budget deficit and GDP. Accordingly, the net effect on the budget deficit-to-GDP ratio should depend on the elasticity of both the budget deficit and GDP with respect to changes in the government expenditure. This study aims to test empirically whether cutting the government expenditure in Egypt should actually be expected to lower the budget deficit-to-GDP ratio; it employs a mathematical framework that is based on differential calculus and the concept of elasticity using a time series dataset for the Egyptian economy for the period from fiscal year 1981/1982 to fiscal year 2013/2014. The findings indicate that lowering the government expenditure so as to decrease the budget deficit-to-GDP ratio might not achieve the expected aims and thus may not be the proper policy option.fiscal deficit; budget deficit; government expenditure; fiscal policy; Egypt; GDP; gross domestic product; expenditure cuts; spending cuts; differential calculus; elasticity; policy options