Determinants of Budget Deficits in Developing Countries: The Role of Macroeconomic Conditions and Institutional Quality

Abstract

Budget deficits remain a persistent fiscal challenge in developing countries, where limited revenue capacity, rising public expenditure, economic instability, and structural constraints can weaken fiscal sustainability and restrict opportunities for long-term development. Understanding the factors associated with fiscal imbalances is therefore important for strengthening public finances and improving economic resilience. This study examines the effects of macroeconomic conditions, structural determinants, and institutional quality on budget deficits in developing countries using panel data covering 50 countries from 1990 to 2024. A quantitative empirical approach is employed, incorporating descriptive statistics, Pearson correlation analysis, and multiple regression to assess the relationships among the study variables. The findings indicate that adverse macroeconomic conditions are positively and significantly associated with budget deficits, demonstrating that economic instability and related fiscal pressures contribute to widening fiscal imbalances. Structural determinants also exhibit a positive and statistically significant relationship with budget deficits, highlighting the importance of persistent economic, demographic, financial, and debt-related conditions. In contrast, institutional quality has a significant negative relationship with budget deficits, indicating that stronger institutional capacity is associated with improved fiscal outcomes. The regression results further confirm that the selected explanatory factors jointly provide meaningful explanatory power for variations in budget deficits. The findings demonstrate that fiscal performance in developing countries is shaped by the combined influence of macroeconomic conditions, structural characteristics, and institutional capacity. Effective deficit management therefore requires an integrated policy approach that promotes macroeconomic stability, addresses structural constraints, strengthens institutional effectiveness, and supports sustainable public finances.

Keywords: Budget Deficit, Macroeconomic Conditions, Structural Determinants, Institutional Quality.