Examining the Effect of Financial Corruption on Budget Deficits in Selected Countries

For many years, the budget deficit has been studied as an important variable in economics, and various schools and scholars have identified its causes and influential factors. However, since the 1990s, increasing attention has been directed toward the effect of institutional and political indicators on the budget deficit, and corruption has been introduced as one of the key contributors. This article, by introducing and calculating a composite index of financial corruption based on the deprivation theory and choosing the four economic dimensions of government spending, investment, income and economic freedom, investigates the effects of financial corruption on the budget deficit in 120 selected countries from 2007 to 2017 using the generalized torque method (GMM). The results show that, assuming other conditions constant, a one- unit increase in the corruption index increases the budget deficit by an average of 49/3 units, which indicates the positive and direct effect of corruption on the budget deficit. Also, according to the significance of the estimation, the variables of inflation, government spending, taxes and oil revenues have a positive effect on the budget deficit, while higher economic growth leads to a reduction in the budget deficit.