Budget Deficit and Economic Growth in Cote d’Ivoire: A Search for Threshold

Abstract

This study examines the effect of budget deficit on economic growth in Cote d’Ivoire. The study applies threshold regression model to annual data covering the period 1970-2022. The results show that fiscal policy significantly influences economic growth rate. Further, the study establishes that the threshold level of budget deficit conducive for economic growth is 4% of GDP. Beyond this threshold, budget deficit is detrimental to economic growth. As the actual budget deficit is above 4%, the study recommends measures aimed at increasing domestic revenue and enhancing efficiency of public spending to enable the country reap more economic growth associated with fiscal policy. In this regards, efforts should be deployed to reduce tax revenue losses from exemptions and evasion which represent a potential of 4.2% of GDP, i.e. more than FCFA 1800 billion. Under certain assumptions, the “true” budget deficit threshold of Cote d’Ivoire is around 2% of GDP.