Abstract:
Bangladesh and Sri Lanka are consistently facing budget deficit problems since independence.
This study used secondary quantitative time series data of two different period datasets from
1982 to 2020 for Bangladesh and from 1990 to 2020 for Sri Lanka. All datasets are collected
from the international monetary fund. This study explores the impact of budget deficits on the
economic growth of Bangladesh and Sri Lanka, respectively. We select budget deficit as a
percentage of the gross domestic product as the independent variable and economic growth
rate as the dependent variables for both country analyses. Development and economic progress
are difficult to define. Growth is more than just increased GDP or infrastructural development.
Different schools of thinking explain story differently. In traditional political economy, growth
rivals development. Neoclassical and Keynesians likewise emphasize growth for economic
success. Marxists, radicals, and Neo-Marxists criticise capitalism progress. Later, Amartya Sen
and others emphasised well-being, competence, and endowments. Economic growth is tied to
fiscal policy. Macroeconomic analysis of growth is needed to examine the budget deficit and
economic growth. The underpinning background theories of this study are Keynesian theory,
Ricardian equivalence theory, Hirschman disequilibrium theory, Rostow’s growth stage model,
and Dependence theory of economics. The study selects two models for two countries based
on unit root test output. The study used summary statistics, correlation matrix, unit root test,
lag selection criteria, autocorrelation test, heteroscedasticity test, etc. The applied model for
Bangladesh data was the vector error correction model (VECM), and that for Sri Lanka was
autoregressive distributed lag (ARDL). Statistical tools validated most of the statistical
findings. Bangladesh's budget deficit hurts economic growth, whereas Sri Lanka's does not.
Two datasets had different outcomes. Both results support Keynesian theory. This analysis
determined Sri Lanka's budget deficit is positive and Bangladesh's is not a harbinger.
