The effects of shock of budget deficit and public sector debt and government financing methods on consumption and wealth components of economic welfare index

Subject Areas : Computational economics

Alireza Fathi ¹ , fatemeh zandi ² , bijan safavi ³ , Mahnaz Rabiei ⁴

1 - Faculty of Economics and Accounting, Islamic Azad University, South Tehran Branch
2 - Faculty of Economics and Accounting, Islamic Azad University, South Tehran Branch
3 - Faculty of Economics and Accounting, Islamic Azad University, South Tehran Branch
4 - Faculty of Economics and Accounting, Islamic Azad University, South Tehran Branch

Received: 2024-07-12 Accepted : 2024-10-21 Published : 2025-01-27

Keywords: Government budget deficit, public sector debt, economic welfare index, consumption, wealth,

Abstract :

Extended Abstract

Purpose

The purpose of this research is to investigate the impact of shock of budget deficit, public sector debt and government financing methods on the economic welfare index (with an emphasis on the consumption and wealth components) using the Structural Vector Autoregressive Model and annual data over a period of time from 1371 to 1401 S.H. The results indicate that in the long term, the budget deficit has no effect on the consumption and wealth index, the effect of public sector debt (government debt to the country's banking system, including borrowing from the central bank, banks and credit institutions) on the consumption index is negative and on the wealth index is positive. The effect of money issuance and liquidity growth on the consumption and wealth index is negative, the effect of government financing through the issuance of bonds on the consumption index is positive and more strongly positive on the wealth index. Direct tax on the consumption index has positive effects and tax on wealth and property also has an inverse relationship with the wealth index. The results of the research indicate that the government budget deficit alone does not have an effect on the consumption and wealth index, while the consequences of the budget deficit and financing methods can overshadow consumption and wealth.

In recent years, due to the unprecedented increase in liquidity, taxes and inflation rate, the disposable income in Iran has decreased significantly, which can have a negative effect on consumption and wealth on the one hand, and on the other hand, increase the budget deficit and public sector debt. As a result, the study of the subject under investigation is of special importance and necessity at the present time, because the problem of budget deficit and government debt, as well as the severe reduction of economic welfare in Iran, is undeniable. From the examination of the above cases and the resulting results, it is possible to understand the severity of the influence of the economic welfare index and household behavior in Iran in relation to monetary and financial policies. Also, regarding the level of government involvement in Iran's economy and the policies adopted during the period of 1371-1401 and the relationship between them and the trend of the economic welfare index, it obtained significant results.

Methodology

According to the purpose of this article, the best research method is the use of multivariate (systemic) time series patterns, the self-regression pattern of structural survey (SVAR). The main goal in this model is to use economic theories instead of Cholsky's analysis, so that it is possible to recover structural impulses from the impulses of the resolved form.

Finding

The results indicate that the budget deficit variable does not have a significant effect on the consumption index, while public sector debt (the government's debt to the country's banking system) causes a decrease in consumption, money circulation and increased liquidity are also identified as the biggest factors in reducing the consumption level index. became Government financing methods, including direct taxes, have a positive but relatively small impact on the consumption index, and finally, government financing through the issuance of bonds has a relatively small positive effect on the consumption index.

Regarding the effects of the above variables on the wealth index, the budget deficit variable has no effect on wealth, public sector debt has had a positive and significant effect on wealth, money circulation and increased liquidity also cause a decrease in wealth, and bond issuance is the most important factor. The level of wealth has increased, while the tax on wealth has an inverse relationship with the amount of wealth.

Conclusion

According to the results obtained in this research, it can be concluded that the government budget deficit alone has no effect on the consumption and wealth index, while the consequences of the budget deficit and financing methods can overshadow consumption and wealth.

The increase in the amount of money reduces the value of the national currency and the level of household consumption in Iran, this causes the value of people's assets to decrease as a result of the household's purchasing power, disposable income and consequently consumption. On the other hand, since Iran's economy relies on imports, with the increase in liquidity, the value of the national currency decreases, imported goods become more expensive, the demand for goods and services decreases, and as a result, the level of consumption also decreases.

The financing of the government, which is done through creating debt and borrowing from the country's banking system, greatly reduces the level of household consumption. In other words, the country's banking system, which is responsible for providing resources to economic enterprises and households, allocates a large amount of these resources to the government sector, which reduces the share of resources allocated to the private sector, and this reduces the access of enterprises and households. It goes to bank resources in the economy, as a result, production and consumption in the economy decreases.

An increase in direct taxes will increase consumption to some extent, and an increase in wealth tax will decrease the amount of wealth. In other words, since there is a progressive tax in Iran, the increase in the tax rate includes most of the households with high income, so the level of consumption of households with high income is reduced to some extent and their wealth is also reduced, the government is considering acquiring resources. As a result of taxes, income and transfer payments are distributed to the weaker sections, as a result, since these sections include a large share of the country's population, it leads to an increase in the level of household consumption in the country.

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