Does Budget Deficit Crowd Out Private Investment? Cote d’Ivoire As A Focus

Abstract

This study examines the impact of budget deficit on private investment in Cote d’Ivoire. It uses data from 1975 to 2022. Using the autoregressive distributed lag approach, the results disclose a negative relationship between deficit and private investment, providing support to the crowding out hypothesis. This suggests that high deficits driven by government expenditure slow down private investment. Estimating a threshold model, the results confirm the significance of a nonlinear relationship between deficit and private investment. The results indicate that budget deficit lower than 2.3% of GDP is positively associated with private investment. However, once the budget deficit exceeds this threshold, it turns to be neutral to private investment. Since 2020, the budget deficit is higher than the threshold of 2.3%. Therefore, policy-makers are advised to take measures reducing deficit at a level conducive to investment and economic growth. Government should improve tax revenue and restrain the growth of public expenditure while enhancing its efficiency.