Budget Deficit and Economic Growth: A Fiscal Policy Evaluation of Bangladesh

This study examines the relationship between budget deficit and economic growth and evaluates whether budget deficit creates ‘crowding-in’ effects in private sector investment. This study uses the demand for goods model of the Keynesian framework. Using secondary data for the period 2006-2019, this study shows a positive, but insignificant, relation between budget deficit and economic growth, indicating that monetary policy, fiscal policy, external economic conditions, and various structural factors are influencing both the budget deficit and economic growth independently. On the other hand, the study shows a positive and significant relationship between investment and economic growth, indicating that there is a ‘crowding-in’ effect on investment, suggesting that encouraging investment can be a strategy to promote the economic growth of Bangladesh. Finally, the study shows a negative, but insignificant, relation between debt and economic growth, reflecting that increasing debt does not directly cause economic growth to decline. Other factors, such as economic policies, external shocks, and structural issues, are influencing both debt levels and economic growth independently.