Government expenditure, budget deficit and shadow economy

ABSTRACT

The shadow economy has emerged as a challenging issue for countries globally, particularly emerging markets. An increased budget deficit prevents the governments from using public expenditure to control the increased shadow economy. This paper examines the effect of government expenditure on the shadow economy and the moderating role of budget deficit affecting this impact for the ASEAN-7 countries from 1990 to 2019. We find that increased government spending is associated with an increased shadow economy in ASEAN countries. Interestingly, the effects of government expenditure on the shadow economy intensify with increased budget deficit in the short and long term.

KEYWORDS:

• Government expenditure
• shadow economy
• budget deficit
• ARDL
• the ASEAN countries

JEL CLASSIFICATIONS:

• E6
• H6
• H11

Disclosure statement

No potential conflict of interest was reported by the author(s).