1. expenditure exceeds income from taxation, customs


The budget deficit has been an object of research since the 1920s. Thus a few
definitions need to be made in order to understand the content. According to
?entekin (2002),  the balanced budget can
be defined as follows: “Expenditure and tax equality are not allowed to be
borrowed as a result. In the other sense, which is called the golden rule, the
equalization of income and consumption expenditures is only to allow for
investment financing.”.  According
to Özen (2005), budget deficit can be defined as follows: “the amount by which government expenditure exceeds income from taxation, customs duties, etc,   in any one fiscal year .”.

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The budgets, which are the texts that authorize the income and expenditure of
the state to be estimated for a future period and to collect the incomes and
make the expenditures, must be substantially equivalent.  Hence equivalent budget was defended between
1700 and 1920 when the Classical Economics Approach was dominant. The basic
argument of classical opinion, “laissez- faire, laissez-passer,” found
a place on the budget. The equivalent budget has been defended, otherwise, the
budget deficits will lead to economic instability. According to the classical
approach, the state should only prepare the budget to meet the pure public
goods such as clean air, national defense, the judiciary, lighthouses,
street lights. They argued that a deficit
budgetary would increase extraordinary income borrowing and that debt would
harm the public balance. This view was as
effective as the Great Depression of 1929, but it did not find a solution to
the economic crisis that started in the US and spread all over the world.

Another important aspect of the budget deficit is Keynesian Approach. The
Keynesian approach, which is seen as a way out of the crisis and adopted as an
alternative to the Classics, has gained a new sense of budget. According to
this approach, the state should intervene the economy through public revenues,
public expenditures, and budget. They advocated 
the importance of the budget deficit theory against the classical
argument and suggested that they could influence macroeconomic indicators

The economic crisis that was overthrown by the Keynesian view led to a new
economic problem. Beyond public needs, the economic structure has become a
financial problem for the needs of the state that the state is fully
interventionist. How are budget deficits to be financed and the methods of
financing these ones of the issues that economists have been debating for  many years.

In the history of development economics, the budget deficit has been thought of
as a key factor in many countries. The budget deficits, which make up a
significant part of the public sector deficits, for many years, both developed
and developing countries as an economic problem.  In this study, the impact of budget deficits on interest
rate will be examined.

The study consists of five parts. The reason for the work and the basic views
on which it is based are presented in the introduction. In the second part, the
literature on the relationship between budget deficits and economic growth is
presented. In the third part, the methods used in the
analysis are explained in detail. In the fifth section analyzes the findings
have been made in the overall assessment of the economy in the light of Turkey.

2. Objective

The budget deficit is a common, chronic disease of developing countries. Thus
many authors are researching the following question: Are budget deficits
contagious or affect economic indicators? The purpose of this  investigation was to explore the relationship
between budget deficits and growth. The research seeks to address the following
question: Is there a positive or negative effect of  budget deficits on growth ?

3. Literature

investigators have examined the effects of budget deficit on growth. There are
a large number of published studies (e.g. Günayd?n (2000), Barro (1991)
, Oxley (1994),  Metin (1998) etc.) that describe the link
between budget deficits and interest rate. 

Günayd?n (2000), with the help
of the 1950-1998 annual data, he obtained results supporting the deliberated
Wagner Law with cointegration and causality tests in the framework of Keynes
and Wagner’s Law.

Barro (1991)
used horizontal cross-section data for 98 countries with data from the
1960-1985 period, resulting in a negative relationship between growth rate and
public consumption expenditures.

Oxley (1994)
analyzed the cointegration and the Granger causality with the 1870-1913 period
England, and found that the causality is toward economic growth and public

Ar?soy (2005) from Turkey in the relationship between public spending and
economic growth 1950-2003 period for the cointegration test with annual data
Wagner and analyzed by Keynes hypothesis, economic growth in the long term
suggesting that increased public spending Wagner has obtained evidence
supporting the law.

(2007) study, the budget deficit in Turkey definitions, causes and forms of
financing have stopped on, after mentioning the historical development of the
budget deficit has made recommendations for solving the deficit.

Metin (1998) applied regression analysis with EKK in the period of 1950-1987
and reached the result that the growth rate and budget deficits were
influential on inflation.

Adak (2010) assessed the relationship between public deficits and
economic growth by applying the least squares method with annual data for the
period 1972-2006. As a result, the effect of the budget deficit on economic
growth was not statistically significant.

This study is different from the above study as an example of caretaking will
be discussed in Turkey.

4. Methodology

Both qualitative and
quantitative methods were used in this investigation. When the relationship
between growth and budget deficits is examined, different opinions arise in
terms of causality. The Keynes Act, which argues that the increases in public
expenditure are the result of economic growth, is based on the Wagner Act, and
that economic growth depends on the increase in public spending. In this study,
Turkey’s economy in 2004-2008 growth rate in the period and the budget deficit
/ GDP to be aspects of the relationship between two variables Granger (1969),
the aid will be studied to determine causality analysis. % Change in the GDP
variable used as the growth rate variable from the data used in the study was
used and TUIK was compiled.

In the Granger causality test, two different
situations arise from the aspect of the relationship. These;
One-way causality: Z = f (x) where Z is the
dependent variable and X is the independent variable in a single equation
model. Here, there is a causality relation from X to Z (X ? Z). Here, the
independent variable (X) produces a one-way result over the dependent variable
(Z). This shows the existence of a unidirectional causality relation, which can
also be defined as (Z ? X).

Two-way causality: There can be a mutual effect between variables (X ? Z).
These two variables cannot affect each other, that is, they are independent of
each other. In short, it can be said that there is no relation between

5. Conclusion
Public sector budget
deficits of the main reasons of macroeconomic problems are higher interest rate
in the economy in developing countries such as Turkey, high current account
deficit, high volatility, a high exchange rate and high inflation rate. These budget deficits stem from the fact that public
incomes cannot be increased sufficiently compared to public expenditures.
About this subject; the question is whether the
increase in budget deficits is due to an obligation that arises in parallel
with economic growth or whether it is due to misapplied fiscal and economic
policies. In the study,  some methods have been used and evaluated in
order to answer the question.

The budget deficits resulting from increased public spending have a
positive impact on economic growth. In other words, as individuals’ personal
income increases due to economic growth, demands for health, education and
training services increase, and the public authority undertakes the task of
redistribution of revenues due to the unfairness of income distribution.
These factors lead to an increase in total
public expenditures. In this respect, the constant increase of public
intervention in the economy confronts the country with chronic budget deficits
and inflationary pressures. At the same
time, this result supports the hypothesis that increases in public
expenditures, which are considered as an external variable in the Keynes Act,
will increase national income and therefore cause the public expenditure to
budget deficits.

In short, because of the structural problems encountered in Turkey, winning the
continuity of budget deficits in developing countries compared to developed
countries it seems to have become chronic. Accordingly,
it can be said that the budget deficits are closely related to the applied
financing methods, which affects the macroeconomic balances negatively. On the other hand, financing of economic growth
through budget deficits should be considered as a tool that can be used for
limited measures, and developing countries need to develop policies to
encourage investments by developing policies for the effective use of

In order for economic growth and development to be able to direct the economy
through borrowing, additional borrowing funds must be used for more efficient
investments. If borrowed resources are used in the form of closing budget
deficits, they will not have a positive effect on growth and development.