The effect of cutting down the government expenditure in Egypt on the budget deficit-to-GDP ratio

What is it about?

Changes in the government expenditure might lead to unexpected changes in both the budget deficit and GDP. Accordingly, the net effect of expenditure cuts on the budget deficit-to-GDP ratio should depend on the elasticity of both the budget deficit and GDP with respect to changes in the government expenditure. This study aims to test empirically whether cutting the government expenditure in Egypt should actually be expected to lower the budget deficit-to-GDP ratio; it employs a mathematical framework that is based on differential calculus and the concept of elasticity using a time series dataset for the Egyptian economy for the period from fiscal year 1981/1982 to fiscal year 2013/2014.

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Why is it important?

This publication stresses on the fact that austerity measures that are based on expenditure cuts might not always represent the proper policy option to reduce the budget deficit-to-GDP ratio. If the elasticity of GDP with respect to government expenditure is relatively high, as the case in Egypt, cutting down the government expenditure would have a contractionary impact on GDP which results into a higher, rather than a lower, ratio of budget deficit to GDP.