The Impact of Government Size on Financial Stability Indicator: A Case Study of Jordan

Abstract

This study investigates the impact of government size indicators—specifically tax revenues, government capital expenditure, and government current expenditure—on the financial stability indicator, represented by the ratio of government debt to gross domestic product (GDP) in Jordan from 2007 to 2023. Data were sourced from the Ministry of Planning, the Central Bank, and the Department of Statistics in Jordan. The analysis was conducted using Bayesian VAR Estimates techniques within the E-Views statistical program to test the study's hypotheses. The results indicate a significant influence of government size on financial stability. Specifically, government capital expenditure is found to reduce the ratio of government debt to GDP, suggesting its role in promoting financial stability. In contrast, both tax revenues and government current expenditure exhibit a positive relationship with the debt-to-GDP ratio, although the impact of these parameters is minimal. This suggests that while the government is striving to achieve financial stability, increasing current expenditure complicates this goal as tax revenues remain insufficient to cover these expenses. Variance analysis further reveals a short-term relationship between government size and financial stability. It is vital to regulate current expenses and explore unconventional funding sources, such as issuing Islamic bonds, to bolster financial stability.