The Impact of General Expenditures on Economic Changes in Jordan

Transcription

1 The Impact of General Expenditures on Economic Changes in Jordan Corresponding author Khaldoun M. Al-Qaisi Assistant Prof. of finance, Faculty of Business, Finance Department Amman Arab University, Jordan Address: Khalda P.O.BOX: 1825, code Co-author Dr. Hesham S. Gharaibeh Dean of (TAGSB) Prof. of finance, Faculty of Business, Finance Department Talal Abu-Ghazaleh Graduate School of Business, Jordan Abstract The objective of this paper is to examine the effect of public expenditure on the economic changes in Jordan. Models were applied to studying the effect of public expenditure on the deficit in public budget. Other model was applied to study the effect of internal debt on public expenditure. The ultimate last model concerned with studying of the effect of different constraints on gross domestic product as an indicator on economic changes. Keywords: General expenditure, GDP, Population, External debt, Internal Debt. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 541

2 Introduction The impact of general expenditure on economical changes is still generating debates among researchers (Abu Nurudeen and Usman, 2010). The function of government presents in protection and provision of public goods (Abdulla, 2000; Al-Yousif, 2000). Governmental protection comes from its role in legislating and enforcing the property rights. This governmental role eliminates the risk of crimes and protect life and property. The other aspect of introducing goods include defense, roads, education, health, and power. Abu Nurudeen and Usman (2010) reported an example of the impact of public expenditures on economy. They interpreted that expending on health and education will improve the productivity of labor and increase the growth of national output. Also, the expenditure on infrastructure including roads, communication, and powerwill minimize production costs and increase the attractiveness of private sector for investment. Al-Yousif (2000); Abdullah (2000); Ranjan and Sharma (2008); and Cooray (2009) reported the governmental expenditure affects positively the economic growth. The extreme of researchers indicates an opposite effect of governmental expenditure on economical growth (Abu Nurudeen, 2010). This extreme of scholars reporter that the increase of governmental expenditure will slow the overall performance of economy. They justified that increasing expenditure will increase governmental taxes and/or borrowing. The impact of higher taxes is connected directly with decreasing individual attitudes to work for long hours or searching for jobs, which will reduce income (Folster and Henrekson, 2001). High taxes for productive enterprises will increase the production cost and so decreasing the investments. In Jordan, the attitudes were given to continue support the standards of living of citizens and expanding social safety net. On the other aspect the economical changes worldwide and the new COPY RIGHT 2012 Institute of Interdisciplinary Business Research 542

3 attitudes of government for privatization increase the expenses loads of citizens and affect the private sector (Ministry of Finance, 2010). So, this paper will investigate the effect of governmental expenditure on economical growth in Jordan under these constraints. Public budget in Jordan Figure 1 shows the change in deficit, change in total revenues and grants, change in total expenditures and change in general budget deficit. The results show close trends of change rate for the period 1968 to 1978 and this change was close to zero. The change in general budget deficit started to increase in 1984 up to The change public deficit started to decrease in the period followed 1996 till now. These trends indicate the governmental care to decrease the public budget deficit. Change in total revenues shows steady trend in the period 1968 up to After 1994, it shows unsteady change which reflects the high vibration in revenues from year to year. The change in total expenditure started to increase from zero in 1992 up to the end of the study period with some variations from year to year. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 543

4 Fig. 1: The Deficit in General budget and Changes in expenditures, revenue and budget deficit during the period Figure 2 shows the change in deficit, change in internal debt and change in external debt. The change in the pervious variables remain almost close up to The period 1997 to 2009 show high vibration in for all debt constrains. The maximum change was registered for the change in internal debt in 2008 which shows high increase and followed to decrease in COPY RIGHT 2012 Institute of Interdisciplinary Business Research 544

5 Fig. 2: Rates of change in the borrowing the government's internal and external, and the change in the budget deficit during the period The change in total general expenditures, total domestic revenue, external debt, cost of living index, internal debt and external aid was low in the period before The period after 1994, all the previous constrains show very high increase indicating that the governmental debts increased in the last years to compensate the deficit in public budget (Figure 3). COPY RIGHT 2012 Institute of Interdisciplinary Business Research 545

6 Fig. 3: The most important statistical indicators for the Jordanian economy during the period COPY RIGHT 2012 Institute of Interdisciplinary Business Research 546

7 Methods The objective of this paper is to study the impact of governmental expenditures on borrowing, the inflation or prices and economical growth. This paper will apply different linear models for the achievement of these objectives. The data in this paper were collected through Ministry of Finance and Central Bank of Jordan from different annual reports for the period The applied models in this research are as follow: LogDef = LogExp + c (1) Where; LogDef: natural logarithm of deficit in public budget Log Exp: the natural logarithm of public expenditures Function (1) will be used to predict the effect of public expenditure on deficit on the long run. LogDD = Logexp + c (2) LogDD: the natural logarithm of internal debt Log Exp: the natural logarithm of public expenditures This function will be used to predict the effect of public expenditures on the internal debt. LogCPI = Log exp + c (3) Where; Log CPI: natural logarithm of price index Log exp: natural logarithm of public expenditures Log CPI = Log Def + c (4) COPY RIGHT 2012 Institute of Interdisciplinary Business Research 547

8 Where; Log CPI: natural logarithm of consumer price index Log Def: natural logarithm of public deficit Log GDP = c+ b1 Log pop + b2 Log LTRANS + b3 Log LCAPEXP + b4 Log LCEXP (5) Where; Log GDP: natural logarithm of gross domestic product Log exp: natural logarithm of public expenditures Results and discussion The effect of public expenditures on the deficit is positive. The increase of public expenditures in Jordan will increase the deficit of about 1.6. The linear regression coefficient shows that the expenditure explains about 62.2% of the deficit. Log Def = log exp (6) t R 2 = AdjR 2 = 0.61 F= DW = 1.82 The public expenditures affect the local debt positively. The function shows that the public expenditure will affect the local debt of about 89.9% through the significant model (7). This indicates there is a strong relationship between public expenditure and local debt in Jordan. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 548

9 Log LDD = log exp (7) t R 2 = Adj R 2 = F= DW = The relationship between public expenditure and consumer price index was positive. This indicates that increasing the public expenditures will increase the consumer price index. This means the increase of public expenditure will affect the prices of goods highly in Jordan. Log CPI = log exp (8) t R 2 = Adj R 2 = F= DW = The deficit in public budget will affect the consumer price index. The relationship show positive relation. This indicates that increasing the deficit will affect the taxes and cost of products which will be accompanied with increasing good prices. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 549

10 Log CPI = Log Def (9) t R 2 = Adj R 2 = F= DW = The gross domestic product will be affected negative as the population increased. The workers' compensations, capital expenditures and current expenditures will increase the gross domestic product. Log GDP = Log pop Log LTRANS Log LCAPEXP Log LCEXP (10) t R 2 = Adj R 2 = F= DW = Conclusions According to the previous results, it could be concluded that: 1. The governmental expenditures affect negative the deficit in public budget, internal debt and external debt. 2. Increasing public expenditures will affect the consumer prices negatively and the public deficit will affect negatively the consumer price index. 3. The gross domestic product is affected negatively by population and positively through the compensations of workers, capital expenditure, and current expenditures. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 550

11 References Abdullah HA, 2000.The Relationship between Government Expenditure and Economic Growth in Saudi Arabia.Journal of Administrative Science, 12(2): Al-Yousif Y, Does Government Expenditure Inhibit or Promote Economic Growth: Some Empirical Evidence Abu Nurudeen; Usman, A Governmental expenditure and economic growth in Nigeria, : A disaggregated analysis. Business and Economic Journal.Vol. 2010, BEJ. Folster S, Henrekson M, Growth Effects of Government Expenditure and Taxation in Rich Countries. EuropeanEconomic Review, 45(8): [ Ministry of Finance Annual governmental financial report. Amman, Jordan. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 551

12 Appendices Table (1) The Deficit in General budget and Changes in expenditures, revenue and budget deficit during the period Year Change Deficit / Surplus Including Grants Change Revenues Grants Total and Change in Total expenditures General Deficit Budget COPY RIGHT 2012 Institute of Interdisciplinary Business Research 552

13 General Budget Deficit = total Revenues and Grants - Total expenditures. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 553

14 Table (2) Rates of change in the borrowing the government's internal and external, and the change in the budget deficit during the period Year Change in Deficit Change in Internal Debt Change External Debt in * * * * * * * * COPY RIGHT 2012 Institute of Interdisciplinary Business Research 554

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16 Table (3) The most important statistical indicators for the Jordanian economy during the period Year Total General Expenditures Total Domestic Revenue External Debt Internal Debt External Aid Cost of Living Index (1986=100) COPY RIGHT 2012 Institute of Interdisciplinary Business Research 556

17 COPY RIGHT 2012 Institute of Interdisciplinary Business Research 557