Analysis Of Budget Deficit And Its Structural Determinants In Ethiopia

Immediately following the declaration of socialism in therncountry in 1975, both government revenue and expenditurernincreased substantially . Nevertheless, the growth of governmentrnexpenditure was not matched by growth of revenue hencernpersistent and large budget deficits became the feature ofrnEthiopian economy. In the face of growing budget deficits thernmilitary government made no attempt to control its expenditurernbut relied up on continuous increase in tax rates, introductionrnof new taxes and manipulation of the ceilings imposed onrnGovernment borrowing from domestic sourcesrn.rnThis study examined whether the structural factorsrnhypothesised by Morrison (1982) are responsible f or the growingrnbudget deficit. The estimated regression results show that inrnthe long run government budget deficits is likely to increasernthe higher is the degree of government involvement in therneconomy, the less exercise control over expenditure, thernhigher is revenue instability and the lower is growth inrngovernment revenue. However, the hypothesis that budget deficitrndecreases as economy grows is not supported . In the short runrnit is only growth in government revenue that is found tornexplain the deficits.rnrnAl though the recent policy of the Transitional Governmentrnof Ethiopia planned to decrease the budget deficits, thisrnObjective was not attained due to the reduction in tax rates.rnMoreover, the introduction of the regional administration ledrnto the duplication of government bureaucracy thereby pushingrnup the expenditure level.

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