Growth Effects of Fiscal Deficits in Sri Lanka

This study examines the economic growth effects of fiscal deficits in the light of policy debates on the Sri Lankan economy during the period 1970 to 2015. More specifically, the study attempts to answer whether the persistent increase in fiscal deficit in Sri Lanka hindered or supported economic growth during the period under review. If it is concluded that economic growth has been negatively affected by fiscal deficits, then the deficits targeting within the Sri Lankan economy becomes extremely important. On the contrary, if fiscal deficits have positively contributed to economic growth, then controlling the size of fiscal deficits becomes expensive in terms of economic development. The empirical evidence in this study confirms that fiscal deficits had an adverse impact on the output growth of the Sri Lankan economy, implying that policy makers needed to control high levels of fiscal deficits to attain the desired levels of growth. The findings further confirm the neoclassical view, which indicates that an increase in fiscal deficits would reduce economic growth, as in the context of the Sri Lankan economy. Moreover, the results reinforce the argument in favour of expeditiously implementing effective strategies for deficit reduction.