THE EFFECT OF FISCAL BALANCE ON PUBLIC DEBT IN GHANA

ABSTRACT

Increasing public debt in Ghana has been a major concern to the nation. There are several factors that influence the public debt which includes the fiscal balance, that is either a deficit or a surplus. This study investigated the influence of fiscal balance on total public debt. The results reveal that fiscal deficit increases total debt and domestic debt while surpluses lead to an increase in the external debt though the long run relationship between fiscal deficit and external debt is not significant. Other variables that were included in the model are foreign direct investment, GDP growth rate, gross fixed capital formation, inflation at consumer price index, trade openness, current account balance, executive constraint, interest payment, population growth rate and democratization. It is recommended that since fiscal deficit is detrimental to both the total debt and domestic debt, the government must consider reducing its expenditure through fiscal adjustments. Also, the government agencies that are in charge of the revenue must consider the broadening of their tax base in order to reduce the deficits. If the domestic revenue increases, the deficit would reduce as well and thereby reducing the public debt.