55th International Scientific Conference on Economic and Social Development – Baku, 18-19 June, 2020

DYNAMICS OF STATE BUDGET EXPENDITURES AND ECONOMIC

GROWTH: INTERNATIONAL EXPERIENCE AND CURRENT
CONDITIONS

Esmira Guluzada
Azerbaijan State University of Economics (UNEC)
Istiglaliyyat str. 6, Baku, Azerbaijan Republic
[email protected]

ABSTRACT
At present, analysis of the effectiveness of fiscal policy through optimization issues, research of
the cause-effect relationship between macroeconomic indicators such as economic growth,
revenues and budget expenditures, and the evaluation of a number of econometric models are
necessary factors in political decision making. The necessity of these fields makes it important
to research and analyze the effects of fiscal policy on the economy and therefore, the subject of
the article can be considered actual. In order to examine the role of this macroeconomic
phenomenon in the development of the economy and social welfare, the goals and objectives
determined in the article have been consistently analyzed. Although the initial signs of the "2008
global financial crisis", which caused great losses in the world economy, were felt in the
banking system, they also caused significant losses in fiscal structures. The next global
economic crisis, which began mainly with the problems in the political relations of the world's
leading countries and formed in late 2014, has created very difficult conditions in the fiscal
environment of the states. These negative shocks in the world oil market have affected the
economy of Azerbaijan and led to a several-fold decrease in the strategic foreign exchange
reserves of the Central Bank of the Republic of Azerbaijan. In the article, the existing
international experience of governments on fiscal policy frameworks has been analyzed and
the effect of changes in budget expenditures in Azerbaijan on non-oil GDP for the period
2005Q1-2017Q3 has been assessed. As a result of the analysis, it has been elucidated that the
Russian Federation, the Republic of Lithuania and Latvia, from the post-Soviet countries, chose
a wider fiscal policy course during 2000-2017 years. After the 2008 global financial crisis, in
post-soviet countries other than Azerbaijan, Moldova, the Russian Federation and the Kyrgyz
Republic, financial spending declined for several years. As a result of econometric assessments,
it has been determined that in the short term, a 1 percent increase in the current price of state
budget expenditures led to a 0.36 percent increase in non-oil GDP, while in the long term, a
one percent increase in state budget expenditures led to a 0.69 percent increase in non-oil
GDP.
Keywords: budget expenditures, economic growth, fiscal expansion, fiscal policy framework,
government debt, non-oil GDP

1. INTRODUCTION
At present, analysis of the effectiveness of fiscal policy through optimization issues, research
of the cause-effect relationship between macroeconomic indicators such as economic growth,
revenues and budget expenditures, and the evaluation of a number of econometric models are
necessary factors in political decision making. The necessity of these fields makes it important
to research and analyze the effects of fiscal policy on the economy and therefore, the subject of
the article can be considered actual. In order to examine the role of this macroeconomic
phenomenon in the development of the economy and social welfare, the goals and objectives
determined in the article have been consistently analyzed. Although the initial signs of the
"2008 global financial crisis", which caused great losses in the world economy, were felt in the
banking system, they also caused significant losses in fiscal structures.

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 55th International Scientific Conference on Economic and Social Development – Baku, 18-19 June, 2020

The next global economic crisis, which began mainly with the problems in the political relations
of the world's leading countries and formed in late 2014, has created very difficult conditions
in the fiscal environment of the states. These negative shocks in the world oil market have
affected the economy of Azerbaijan and led to a several-fold decrease in the strategic foreign
exchange reserves of the Central Bank of the Republic of Azerbaijan. Much work and scientific
studies have been realized to evaluate the impact of fiscal policy and budget expenditures on
economic growth in Azerbaijan and to analyze the effectiveness of the state budget. Research
studies of many economists have been published on the topics discussed in the article and
presented to the scientific community. D.Sc. (econ.) D.Baghirov's books "Finance" and
"Corporate Finance" in this field covers a wide range of theoretical and practical problems of
the financial system and provides interesting explanations [2], [3]. The report prepared by the
International Monetary Fund staff on the Azerbaijani economy [7] can be considered as a
detailed analysis of fiscal policy and its contours. They researched the macroeconomic situation
in Azerbaijan and the spectrum of fiscal policy on the basis of the neoclassical growth model.
Azerbaijani scientists Yadulla Hasanlı, Vilayat Valiyev and Namig Bakhishov conducted a
study on the socio-economic consequences of budget spending channels for this problem [6].
They made an econometric assessment of the impact of Azerbaijan's budget expenditures on a
number of macroeconomic indicators, such as inflation, wages, GDP growth, etc. The research
conducted by Jurgen F. Conrad, an expert of the Asian Development Bank in the field of
analysis of Azerbaijan's fiscal policy, is also noteworthy. He analyzed the financial system of
Azerbaijan in general and compared its current financial situation with other post-Soviet
countries. Furthermore, Kh. Aliyev, O. Nadirov, J. Mikayilov, J. Yusifov and others have
researched in detail the assessment of the effects of fiscal policy on economic development.
Based on this research and many other international articles, the article analyzes the
effectiveness of fiscal policy and examines the cause-effect relationship between economic
growth, revenues and budget spending. The article also provides an assessment of a number of
econometric models.

2. INTERNATIONAL EXPERIENCE IN FISCAL POLICY

This problem has been extensively covered in international practice. This problem is researched
in depth in both developed and developing countries. The modern world economy has faced
some economic difficulties since the crisis. Global debt in 2016 was 164 trillion dollars, which
is estimated to be 225 percent of global GDP. In 2016, the total amount of debt accumulated in
the world amounted to 12 percent of GDP, and thus renewing the previous record level, ie in
2009. The growth of public debt has an important role in the growth of global debt, and
according to the expectations of the International Monetary Fund (IMF), no significant
improvement is expected in this trend in the medium term [8, p. 1]. The increase in government
debt was mainly due to the global financial crisis and the response of government policies to it,
as well as falling commodity prices and rapid cost growth in 2014 against the background of
developing and low-income countries. For developed economies, the debt-to-GDP ratio has
stabilized at more than 105% since 2012, and no such level of debt has been observed since
World War II. There are several reasons why high public debt and budget deficits encourage
governments to create reserve buffers to reduce the deficit and manage debt [8, p. 1]:
• Firstly, high public debt results in countries in being at risk due to the need for large
financial assistance, especially short repayment periods.
• Secondly, countries may experience unexpected increases in the ratio of public debt to GDP,
which can lead to more risks.
• Thirdly, high levels of government debt make it difficult to implement contour cyclical
policies, especially in times of financial crisis.
• Fourthly, a high level of government debt could slow the potential growth rate.

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The financial situation among developed countries was neutral in 2017 and the budget deficit
accounted for an average of 2.6 percent of GDP. A weak fiscal expansion policy has been
implemented in several countries, for instance, rising current spendings in the United States,
and capital spending in Canada and Japan. In countries such as Denmark, Finland, the
Netherlands, Norway and Slovenia, as the share of unemployment decreases, the amount of
social spending in the state budget has also decreased. In countries such as Australia, France,
Germany, Korea and the Netherlands, significant increases in income taxes have led to positive
changes in the revenue side of the state budget. Since 2012, reductions in interest expenditures
in France, Germany and Italy, employee payments in Cyprus, Finland and Spain and and some
expendirutres in other countries have led to a 1.6 percent drop in GDP in total spending.

Table 1: Dynamics of the world budget balance (as a percentage in GDP)

2012 2013 2014 2015 2016 2017 2018 2019
World -3.7 -2.9 -2.9 -3.3 -3.5 -3.3 -3.2 -3.3
Developed countries -5.5 -3.7 -3.1 -2.6 -2.6 -2.6 -2.7 -2.8
USA -7.9 -4.4 -4.0 -3.5 -4.2 -4.6 -5.3 -5.9
Eurozone -3.6 -3.0 -2.6 -2.1 -1.5 -0.9 -0.6 -0.5
France -4.8 -4.0 -3.9 -3.6 -3.4 -2.6 -2.4 -3.1
Germany 0.0 -0.1 0.3 0.6 0.8 1.1 1.5 1.7
Italy -2.9 -2.9 -3.0 -2.6 -2.5 -1.9 -1.6 -0.9
Spain -10.5 -7.0 -6.0 -5.3 -4.5 -3.1 -2.5 -2.1
Japan -8.6 -7.9 -5.6 -3.8 -3.7 -4.2 -3.4 -2.8
England -7.6 -5.4 -5.4 -4.3 -3.0 -2.3 -1.8 -1.5
Canada -2.5 -1.5 0.2 -0.1 -1.1 -1.0 -0.8 -0.8
Others 0.5 0.2 0.2 0.1 0.6 1.0 0.6 0.6
Middle-income countries -1.0 -1.5 -2.4 -4.4 -4.8 -4.4 -4.2 -4.1
Asia -1.6 -1.8 -1.9 -3.2 -3.9 -4.2 -4.2 -4.3
China -0.3 -0.8 -0.9 -2.8 -3.7 -4.0 -4.1 -4.3
India -7.5 -7.0 -7.2 -7.0 -6.7 -6.9 -6.5 -6.5
Europe -0.7 -1.5 -1.4 -2.7 -3.0 -2.0 -1.4 -1.4
Russia 0.4 -1.2 -1.1 -3.4 -3.7 -1.5 0.0 0.1
Latin America -3.1 -3.3 -4.8 -7.2 -6.6 -6.2 -5.8 -5.6
Brazil -2.5 -3.0 -5.4 -10.3 -9.0 -7.8 -8.3 -8.3
Mexico -3.7 -3.7 -4.5 -4.0 -2.8 -1.1 -2.5 -2.5
Arabia 11.9 5.6 -3.5 -15.8 -17.2 -9.0 -7.3 -5.6
South Africa -4.4 -4.3 -4.3 -4.8 -4.1 -4.5 -4.2 -4.1
Low-income countries -1.7 -3.3 -3.2 -4.0 -4.2 -4.3 -4.2 -4.0
Nigeria 0.2 -2.3 -2.1 -3.5 -3.9 -5.8 -4.8 -4.6
Oil-producing countries 1.5 0.4 -1.2 -4.5 -4.9 -3.2 -2.2 -1.9
Note: The negative numbers in the table indicate the share of the budget deficit, and the
positive numbers indicate the share of the budget surplus in GDP. The data for 2018 and
2019 are forecasted.
Source: International Monetary Fund [8, p. 14]

Data on the special share of the budget balance in GDP for the world and some countries have
been summarized in Table 1. Based on the data on the table, it can be said that the world's main
fiscal policy framework in the post-2012 period was mainly characterized by a deficit budget.
After this period, a certain decrease was observed in investment costs. Examples of such
countries are the UK and the USA. However, the interval of decline in investment spending has
been smaller than in the 2010-2012 period. Even in Greece and Norway, there has been an
increase in investment spending to stimulate economic growth.

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Forecasts for 2018 and 2019 support weak fiscal expansion for this period, and debt is expected
to decline by 100 percent of GDP by 2023. The main fiscal policy framework, given in Table
2, shows that they will generally focus on developed countries’ fiscal consolidation policy for
2018 and the next medium term. Moreover, developed countries also intend to take measures
to reduce tax rates and increase the social burden on the budget.

Table 2: The main fiscal policy framework expected for some developed countries (for 2018
and the next medium term)
Countries The main fiscal policy framework
Canada After significant fiscal expansion over the past two years, Canada is expected to
follow a significantly neutral stance in 2018, remaining determined to implement
its long-term infrastructure investment plan.
France The long-term draft budget plans to gradually reduce the annual spending
increase to zero by 2022, which aims to bring the budget deficit to 0.2 percent of
GDP. To this end, special reforms in budget expenditures should be determined.
Moreover, the goverment has admitted to support employment as a policy issue
by reducing corporate tax rates and implementing structural reforms.
Germany The draft budget for 2018 is characterized by a soft fiscal policy. Thus, soft tax
policy, especially the implementation of tax credits for children and social
compensations are the main fiscal policy framework this year. Besides financial
expansion, the basic structural balance will not change in the medium term.
Italy Plans to increase VAT rates in 2018 have been canceled and fiscal policy is
expected to remain broadly neutral.
Japan An additional 0.5 percent budget of GDP was approved and which had been
calculated to partially eliminate the fiscal contraction resulting from the
expiration of the previous fiscal stimulus package. Part of the growing revenue
will be used for child support programs and education.
Spain Despite the fact that the government does not yet have a specific financial plan
for the medium term, it is planned to increase the budget deficit to 0.5 percent of
GDP by 2020. To this end, the government plans to gradually consolidate
spending.
England It is planned to gradually continue financial consolidation, which means keeping
the public sector's net borrowing below 2% of GDP in the current period and
reducing the debt-to-GDP ratio in 2020-2021. The consolidation policy aims to
reduce welfare and current expenditures, excluding defense, education and health
expenditures.
Source: International Monetary Fund [8, p. 16]

In Table 3, a brief overview of the general state of fiscal policy in 2017 for some developing
and middle-income countries has been indicated. Overall, budget deficits in developing
countries and middle-income economies fell marginally in 2017 for the first time in four years
of steady growth. Thus, the budget deficit in these countries fell from an average of 4.8 percent
of GDP in 2016 to 4.4 percent of GDP in 2017. This is mainly due to the reduction of existing
financial dependence between countries. In the Gulf Cooperation Council member states and
in mainly commodity-exporting countries such as Mexico and Russia, the fiscal balance has
significantly improved as a result of rising prices in global markets and cost-cutting policies.
On the contrary, non-commodity exporters such as China, India and Thailand have a relatively
weak fiscal balance. However, the development trends that took place in 2017 did not
completely eliminate the existing trends in income and expenditure indicators in these countries
over the past 5 years.

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Since 2012, tax revenues among non-commodity exporters have been reduced by an average of
1 percent of GDP. This is due to stimulus policies and cyclical regulatory measures in countries
such as China and Turkey. Due to the reduction of corporate income tax rates, mainly from oil
companies, a decrease in tax revenues was also observed in commodity-exporting countries.

Table 3: The main fiscal policy framework for some developing countries in 2017
Countries The main fiscal policy framework
Brazil In 2017, the financial consolidation policy that started from previous periods
continued. As a result of income recovery, possible reductions in some
expenditures and low interest rates on loans, the budget deficit fell from 9% of
GDP to 7.8%.
China The budget deficit increased to 4% of GDP in 2017. During this period, extra-
budgetary investment expenditures have been reduced. However, these
reductions have been fully offset by tax reductions for a number of small
businesses, in particular by lowering VAT rates.
India Fiscal consolidation policy was suspended at the federal level for the 2017-2018
fiscal year, and a new national tax concept for goods and services was
developed, which led to the recovery of the economy. Policies to support the
growth of budget revenues and low capital expenditures by expanding the tax
base was substituted by a high fiscal spending policy.
Indonesia In 2017, the budget deficit has been maintained at 2.5 percent of GDP, and fiscal
expenditures have been rebalanced to target education, health, social defence
and energy subsidies.
Mexico Due to significant reductions in capital expenditures, continued reduction of the
salary fund on the envisaged project and one-time transfers from the Central
Bank, the budget deficit was reduced to 1.1 percent of GDP in 2017.
Russia As a result of the freezing of nominal spending and the support of budget
revenues by rising oil prices, the fiscal deficit was reduced from 2% of GDP to
1.5% in 2017.
Arabia The budget deficit, which was 17 percent of GDP in 2016, was reduced to 9
percent in 2017. The reason for this was measures to increase non-oil revenues
and reduce capital expenditures by 2.5 percent of GDP.
Source: International Monetary Fund [8, p. 17]

Although commodity-exporting countries such as Mexico and Saudi Arabia have implemented
reforms to increase non-commodity revenues, this has not yet led to a significant reduction in
the share of raw material revenues. In about 40 percent of developing countries and middle-
income economies, the share of tax revenues in GDP remains below 15 percent. Moreover, in
all of these countries, the share of all expenditure categories in GDP, except for investment
expenditures, has increased. In the medium term after 2017, it is expected to partially limit
spending in middle-income and developing countries, which is designed to control the budget
deficit. In these countries, keeping the growth of current expenditures below the growth of
nominal GDP is one of the key issues. Although investment costs are expected to weakly
increase in non-commodity-exporting countries, it is expected to decrease in commodity
exporting countries. As the article is related to Azerbaijan's fiscal policy, it is more expedient
to study international experience in terms of post-Soviet countries. In the Table 4, statistics on
per capita government spending in post-Soviet countries have been indicated. These indicators
cover the years 2000-2015.

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Table 4: Per capita state budget expenditures in post-Soviet countries, in dollars

Azerbaijan Belarus Estonia Georgia Lithuania Latvia Moldova Russian Ukraine Kazakhstan Kyrgyz Armenia
Federation Republic
2000 70.1 323.4 85.3 80.0 359.7 1542.6 102.4 374.9 170.8 168.6 44.2 -------
2001 68.3 334.4 88.7 79.4 359.4 1509.4 90.8 478.0 215.6 202.3 48.6 -------
2002 75.5 365.1 103.5 87.8 399.3 1738.6 ------- 535.8 255.0 210.4 ------- -------
2003 104.3 513.3 140.0 99.2 509.0 2045.5 121.8 685.7 311.6 287.2 ------- -------
2004 126.4 696.1 173.0 176.0 611.6 2532.8 196.5 885.0 451.0 404.4 ------- 202.1
2005 183.1 945.7 198.1 265.0 709.3 2996.6 243.7 1061.9 659.2 ------- ------- 298.3
2006 363.5 1247.3 237.3 380.3 831.3 3814.5 302.9 1349.5 847.4 ------- 85.9 370.1
2007 616.2 1641.2 311.4 570.5 1126.7 5108.6 398.8 2093.9 1072.5 ------- 130.6 534.9

2008 1031.7 2164.7 397.3 924.6 1507.1 6862.4 555.9 2505.3 1451.9 ------- 161.9 847.7
2009 1142.5 1700.3 381.9 837.5 1444.1 6318.2 580.3 2749.4 1036.2 ------- 163.9 714.4
2010 1219.5 1821.6 354.3 781.2 1385.1 6205.1 570.7 2922.5 1217.3 1493.7 186.1 740.1
2011 1328.5 1659.2 385.1 906.9 1659.7 6270.9 646.7 3341.6 1366.2 1769.3 244.4 796.0
2012 1663.1 1917.1 377.5 1051.5 1420.2 6003.7 681.5 3731.2 1583.4 1956.7 270.0 787.6
2013 1648.0 2254.4 414.7 1042.1 1520.5 6475.8 724.0 3930.7 1619.9 2029.3 274.1 876.3
2014 1744.1 2280.1 437.5 1136.6 1581.6 6885.5 776.4 3730.0 1351.8 1960.5 268.8 958.2
2015 1363.5 1672.3 400.0 967.1 1368.9 5800.3 621.6 2860.9 794.0 1627.7 246.0 907.3
average 796.8 1346.0 280.4 586.6 1049.6 4506.9 440.9 2077.3 900.2 1100.9 132.8 669.4
minimum 68.3 323.4 85.3 79.4 359.4 1509.4 90.8 374.9 170.8 168.6 44.2 202.1
maximum 1744.1 2280.1 437.5 1136.6 1659.7 6885.5 776.4 3930.7 1619.9 2029.3 274.1 958.2
Source: The World Bank, World Development Indicators
http://databank.worldbank.org/data/reports.aspx?source=2&series=GC.XPN.TOTL.GD.ZS

3. THE RELATIONSHIP BETWEEN THE DYNAMICS OF STATE BUDGET

EXPENDITURES AND ECONOMIC GROWTH
In this chapter, the contribution of state budget expenditures to economic growth, which is one
of the most active components of fiscal policy, has been analyzed. To this end, the assessment
of the impact of budget expenditures on economic growth by econometric methods, and more
precisely, the changes in non-oil GDP caused by a 1 percent increase in budget expenditures
have been researched. In the Table 5, statistical indicators of state budget expenditures and non-
oil GDP have been indicated. The table shows that statistics on non-oil GDP and state budget
expenditures are on a quarterly basis. It is known that statistical indicators of economic
variables collected on a quarterly basis are very sensitive to seasonal factors. For this reason,
both variables have firstly been cleared of seasonal factors. After that, the statistics have been
converted into real values in the prices of the second quarter of 2007 through the deflator
(2007Q2 = 100).

Table following on the next page

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Table 5: Quarterly statistics of GDP and state budget expenditures of Azerbaijan Republic
Date Y X O Date Y X O
2005Q1 2282.09 450.60 53.55 2011Q3 10534.25 4001.23 113.24
2005Q2 2583.79 462.67 59.47 2011Q4 13154.62 3328.75 116.36
2005Q3 2918.09 511.19 72.27 2012Q1 13049.12 3118.79 118.79
2005Q4 3311.79 470.78 65.71 2012Q2 13580.52 4321.18 110.91
2006Q1 3586.39 871.93 68.78 2012Q3 13383.68 4401.24 106.04
2006Q2 4008.33 885.24 79.20 2012Q4 13072.20 4211.66 105.84
2006Q3 5152.20 910.35 78.89 2013Q1 15442.73 5500.06 106.57
2006Q4 4974.29 902.46 66.24 2013Q2 14785.99 4424.78 105.26
2007Q1 5848.91 1373.23 65.29 2013Q3 15179.70 4547.72 110.80
2007Q2 5612.93 1420.22 75.72 2013Q4 13722.47 4760.09 99.56
2007Q3 5726.75 1553.95 84.95 2014Q1 15401.27 5171.72 100.25
2007Q4 9097.40 1347.52 98.23 2014Q2 15556.10 4370.09 104.46
2008Q1 6949.86 1193.79 105.73 2014Q3 14875.20 4369.08 99.13
2008Q2 7966.83 2156.14 134.79 2014Q4 13340.40 4531.35 75.62
2008Q3 8695.40 2276.06 129.31 2015Q1 16292.17 6012.36 49.42
2008Q4 6767.60 2283.99 61.29 2015Q2 17193.27 5186.34 59.36
2009Q1 10943.37 3868.91 47.81 2015Q3 15892.74 3779.53 48.08
2009Q2 11921.88 3313.69 67.54 2015Q4 13291.70 5087.76 39.93
2009Q3 12937.93 3278.92 77.30 2016Q1 12918.12 2918.90 30.43
2009Q4 13681.52 3683.50 84.41 2016Q2 13459.18 3843.88 42.23
2010Q1 8254.32 1786.71 86.85 2016Q3 14156.41 3670.63 42.95
2010Q2 8256.63 1889.48 85.78 2016Q4 13092.01 4664.84 46.03
2010Q3 8099.95 2472.27 84.37 2017Q1 13680.75 3329.35 49.29
2010Q4 10468.26 3247.19 92.28 2017Q2 13780.49 3309.11 47.41
2011Q1 10896.12 2291.29 106.17 2017Q3 15458.89 4099.59 48.55
2011Q2 10973.21 2542.70 121.43 2017Q4 56.07
Note: Y indicates Azerbaijan's non-oil GDP in million manats and X indicates the state
budget expenditures in million manats. Both variables have been converted to real value in
the second quarter of 2007 by deflator (2007Q2 = 100).
Source: Non-oil GDP indicators have been taken from the Central Bank's official website
(https://en.cbar.az/pages/publications-researches/statistic-bulletin/). The state budget
expenditures have been taken from the official website of the Ministry of Finance
(http://www.maliyye.gov.az/node/1551). World oil prices have been derived from The Short-
Term Energy Outlook (STEO) of the U.S. Energy Information Administration's (EIA) (U.S.
Energy Information Administration, EIA Short-Term Energy Outlook).

During research with the implementation of econometric methods, one of the main features to
be considered is that statistical indicators are in a period of time. Thus, this feature of statistical
indicators often leads to their non-stationary. So, statistical indicators stationary of non-oil GDP
and state budget spending have been researched. Stationary means the stability of the variation
in the middle and around the middle of the indicators. According to the statistical indicators of
state budget spending in Table 5, Augmented Dickey-Fuller test [4, p. 427-431], [5, p. 1057-
1072] have been implemented using the application of Eviews program. It has been determined
that the statistical indicators of budget expenditures for the period 2005Q1-2017Q3 are non-
stationary. The first order differences of these series are used to convert non-stationary series
into stationary series. Thus, the statistical indicators of the first order differences of budget
expenditures were re-tested and the first order differences of the statistical indicators of budget
expenditures for the period 2005Q1-2017Q3 are stationary. Similarly, the stationary variability
of the non-oil GDP variable has been analyzed.

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The non-oil GDP variable is also stationary from the first order difference for the period
2005Q1-2017Q3. So, after the initial statistical analysis, the impact of budget expenditures on
non-oil GDP growth was assessed, and the equation that allows for short-term and long-term
analysis was obtained as follows:
Short-term relation analysis:

ln(Yt) = 0.26dln(Yt-1) + 0.36dln(Xt) – 0.24dln(Xt-1) - 0.91Eq(-1) (1)

(0.03) (0.00) (0.00) (0.00)

Y is non-oil GDP, X is state budget spending, and EQ is remainder of long-term relation

equations between state budget spending and non-oil GDP. The numbers in parentheses indicate
the probabilities of the t test. Equation (1) will allow us to analyze both short-term and long-
term causal relations. It is accepted that in the short term, state budget expenditures will lead to
non-oil GDP. The F-test which measures the combined significance of both current and past
period cost coefficents of state budget spending, should be applied to do this. But there will be
no need to apply this test. Because, both the coefficient of current prices (Xt) of state budget
expenditures and the coefficient of previous prices (Xt-1) of a period were statistically
significant. Therefore, the result of the co-significance test applied for short-term causal
analysis will also be important. So, a 1 percent increase in the current price of state budget
expenditures in the short term led to a 0.36 percent increase in non-oil GDP. In the analysis of
short-term relations, the positive effect of current budget expenditures on non-oil GDP is in fact
completely normal. That is, one of the components involved in the calculation of GDP is
government spending, and a significant part of it is the state budget. However, as in Equation
(1), the ratio (-0.24) characterizing the impact of previous state budget expenditures on the
current state of non-oil GDP was negative. The explanation of such a conclusion can be based
on macroeconomic theoretical frameworks and can be considered correct in a sense. According
to the accepted macro principles, the current state budget expenditures could have a negative
impact on economic growth after a certain period. Thus, the government usually raises tax
revenues to increase spending, which in turn narrows the investment portfolio of producers by
increasing the tax burden. As a result, as investment is one of the components of GDP,
economic growth begins to slow. Therefore, the result obtained is consistent with
macroeconomic theory. So, one percent increase in state budget expenditures in the previous
quarter in the 2005Q1-2017Q3 period leads to a 0.24 percent decrease in non-oil GDP in the
current quarter.

3.1. Long-term relation analysis

Based on Equation (1), the long-term impact of state budget expenditures on non-oil GDP will
be analyzed. In this equation, the Eq (-1) limit allows the analysis of the long-term relation.
According to the methodology, if the coefficient of the Eq (-1) limit in equation (1) is
statistically significant with a negative sign, then it can be accepted that the state budget
expenditures will lead to non-oil GDP in the long term. As in the Equation (1), the coefficient
of this limit (-0.91) is negative. It is also statistically significant at a level of significance greater
than 99%. So, it can be accepted that the state budget expenditures for the period 2005Q1-
2017Q3 will lead to non-oil GDP in the long term. The resulting coefficient -0.91 can be used
to test for long-term causality, but it cannot be used as a long-term causal coefficient. To explain
this long-term relation, the corresponding equation can be written as follows:

ln(Yt) = 3.80 + 0.69ln(Xt) (2)

(0.03) (0.00)

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Y is non-oil GDP, X is state budget spending, and the numbers in parentheses is the probabilities
of the t test. Equation (2) can be used to analyze the long-term impact of state budget
expenditures on non-oil GDP. The resulting coefficient 0.69 is the coefficient indicating this
relation. The coefficient was statistically significant at a significance level higher than 99%. So,
one percent increase in state budget expenditures in the long term increases the level of non-oil
GDP by 0.69 percent.

4. CONCLUSION
Another result is related to the effects between state budget expenditures and economic growth.
In this part, assessments have been conducted in two directions and relevant results have been
obtained. Firstly, the impact of budget spending on economic growth has been assessed using
econometric methods, and it has been revealed that in the short-term, a 1 percent increase in the
current price of budget expenditures led to a 0.36 percent increase in the current level of non-
oil GDP, and a 1 percent increase in the previous price of budget expenditures led to a 0.24
percent decrease in the current level of non-oil GDP. The explanation of such a conclusion can
be based on macroeconomic theoretical frameworks and can be considered correct in a sense.
According to the accepted macro principles, the state budget spending in current period can
have a negative impact on economic growth after a certain period. Thus, the government usually
raises tax revenues to increase spending, which in turn narrows the investment portfolio of
producers by increasing the tax burden. As a result, as investment is one of the components of
GDP, economic growth begins to slow. Therefore, the result obtained is consistent with
macroeconomic theory. It should be noted that a 1 percent increase in state budget expenditures
in the long term led to a 0.69 percent increase in non-oil GDP. This is one of the results obtained.
Apparently, this does not correspond to the macroeconomic theory in the previous paragraph.
Because with a certain period of delay (i.e. in the long term), the effect of public budget
expenditures on economic growth is usually negative. It can be accepted that it is normal for
the Azerbaijani economy not to be provided with this theoretical framework in the long term.
Thus, Azerbaijan's state budget expenditures have significantly exceeded revenues over the past
decade. This deficit has been provided not by increasing the tax burden, but by transfers from
the oil fund to the budget, which prevented the negative impact of taxes.

LITERATURE:
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Director for the United Kingdom, www.imf.org.
2. D. Baghirov. “Finance” Textbook. Baku. UNEC Publishing, 2011. P. 384.
3. D. Baghirov. Corporate finance, Baku, 2010, P. 154.
4. Dickey D. A. and Fuller W. A. Distribution of the Estimators for Autoregressive Time
Series With a Unit Root // Journal of the American Statistical Association, 1979, Vol. 74,
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6. Hasanli Y., Bulud J., Valiyev V., Baxishov N. Socio-economic development indicators of
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Staff Report // Country Report No.07/191, Approved by Lorenzo Pérez and Adrienne
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8. International Monetary Fund. Fiscal monitor // World Economic and Financial Surveys,
Aprel, 2018

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