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VOLUME NO. 1 (2011), ISSUE NO.

5 (SEPTEMBER) ISSN 2231-4245


INTERNATIONAL JOURNAL OF RESEARCH IN COMMERCE, ECONOMICS " MANAGEMENT
A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories
www%i1rc0%or#%in
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FISCAL POLICY AND ECONOMIC GROWTH IN PAKISTAN

2EESHAN AHMED
MASTER OF BUSINESS ADMINISTRATION
I+RA UNIVERSITY
KARACHI, PAKISTAN

ABSTRACT
Th$s s!"# $,3es$%+es he *)&e ). .$s-+& ()&$-# $, e,h+,-$,% e-),)'$- %*)6h ). P+:$s+, 1# !s$,% +,,!+& $'e se*$es "++ "!*$,% he (e*$)" .*)' >?@4 ) 45>5.
O*"$,+*# &e+s s/!+*e (*)-e"!*e h+s 1ee, +((&$e". ;$s-+& "e.$-$ $s $,-&!"e" +s + (*)9# ). .$s-+& ()&$-#. M)*e)3e* %)3e*,'e, e9(e,"$!*e +," %)3e*,'e, *e3e,!e
h+s 1ee, -),s$"e*e". Re3e,!e +--)!, $s "$s+%%*e%+e" $,) .e"e*+& +," (*)3$,-$+& &e3e& 6he*e+s e9(e,"$!*e $s 1*):e, ")6, $,) -!**e, +," "e3e&)('e,
e9(e,"$!*es. E'($*$-+&&# $ $s .)!," h+ ),&# he .e"e*+& +," (*)3$,-$+& ,),-+9 *e3e,!es h+3e ()s$$3e s$%,$.$-+, $'(+- ), e-),)'$- %*)6h. O, he )he*
h+,", .e"e*+& +9 *e3e,!e h+s s$%,$.$-+,&# ,e%+$3e $'(+- ), e-),)'$- %*)6h. C),3e*se&#, "e3e&)('e, e9(e,"$!*e (&+# s$%,$.$-+, *)&e $, e,h+,-$,%
e-),)'$- %*)6h 6he*e+s -!**e, e9(e,"$!*es +*e $,s$%,$.$-+, +," h+3e ,) $'(+- $, $,-*e+s$,% he %*)6h. I $s *e-)''e,"e" h+ he %)3e*,'e, sh)!&"
.)-!s ')*e ), ,),-+9 s)!*-es +," sh)!&" $,-*e+se he (e*-e,+%e ). ,),-+9 *e3e,!e $, )+& *e3e,!e. ;!*he* he %)3e*,'e, sh)!&" -! he$* ,),-
"e3e&)('e, e9(e,"$!*e +," '!s $,-*e+se he s$0e ). 1!"%e .)* "e3e&)('e, e9(e,"$!*e $, )*"e* ) $,-*e+se he s(ee" ). e-),)'$- %*)6h.

KEYWORDS
6cono0ic rowth" !iscal Policy%

INTRODUCTION
he probably answer of the ?uestion to an econo0ist that how you can 0easure the econo0ic perfor0ance of any country" the econo0ists probably
tal:ed you about the fiscal policy as bein# an i0portant econo0ic #rowth predictor% 9his pure principle that e7penditure" revenue and other portions of
fiscal policy li:e fiscal deficit 0ay have an i0portant role in 0ana#in# #rowth perfor0ance in addition to durable affects has been uttered in the
fra0ewor: of #rowth 0odel for so0e decades previously 6asterly and Rebelo ;&JJ-<%
In Pa:istan" the GDP #rowth rate was re0ain H%.L in &JG's" (%HL" in &JJ's and in E'''s it was increase to .L% Sa0e as the fiscal deficit in &JG's and &JJ's
re0ain I%&L and H%JL respectively and in E'''s it was reduced to (%(L of GDP% On the contrary" the avera#es of ta7 revenue and non ta7 revenue for the last
decade were &'%(HL and -%IJL respectively but it was recorded in &JG's as &-%GL and -%.L and in &JJ's as &-%(L and -%IL respectively as a percenta#e of
GDP. >heras the avera#e of current e7pendtiure in &JG's was &I%HL" in &JJ's it was &J%(L and in E'''s it was reduced to &.%&L% li:ewise the avera#e of
develop0ent e7penditure in &JG's"&JJ's and in E'''s was I%-L" (%IL" and -%H.L respectively
&
%
In this research study" the i0pact of fiscal policy in 0ana#in# and i0provin# econo0ic #rowth will be e7a0ined% 9he tools of fiscal policy that is #overn0ent
e7penditure and #overn0ent revenue are considered% 9he e7penditure account is further divided into current e7penditure and develop0ent e7penditure% 9he
past studies that were conducted to e70aine the perfor0ance of fiscal policy with econ0ic #rowth have a wea: aspect that is those researches never divided
revenue account in such a way 1ust li:e consider in this study that is revenue account is further disa##re#ate into federal and provincial level to assess their
i0pact on econo0ic #rowth%

LITERATURE REVIEW
Researchers and authors develop 0any theories that hi#hli#ht the tools of fiscal policy and show relationship between fiscal policy and econo0ic #rowth%
THEORETICAL BACKGROUND
9he level of inco0e ;output< and e0ploy0ent in an econo0y is co0posed of a nu0ber of co0ponents" such as" consu0ption" invest0ent and #overn0ent
e7penditure% 9he level of inco0e in an econo0y is" therefore" derived fro0 the total of the various purchasin# co0ponents% In al#ebraically ter0s
E

ADR )] I ] ;E%&%&<
>here AD represents GDP" C is e7penditure on consu0ption" I 0ean invest0ent e7penses and G is the e7penditures by #overn0ent%
Accordin# to =eynesian theory of inco0e and e0ploy0ent" when #overn0ent e7penditure increases" the a##re#ate e7penditure also increases so the curve of
a##re#ate de0and shift upward ;e7pansion policy< and when #overn0ent e7penditure decreases" the a##re#ate e7penditure decreases" the a##re#ate de0and
curve shift downward ;contraction policy<% 9o fill the deflationary #ap" e7pansion policy is used and to cover the inflationary #ap" contraction policy is adopted to
achieve full e0ploy0ent or e?uilibriu0 level in an econo0y%
9he federal #overn0ent spendin# can be used as a tool of #overn0ent financial policy throu#h which they can 0a:e chan#es in ta7es and #overn0ent
e7penditure to pursue the 0acroecono0ic #oals of full e0ploy0ent and low inflation% 9hese spendin# chan#es can still be considered s autono0ous-the result
of policy decisions and not the level of real inco0e% 9hese assu0ptions are incorporated in the #overn0ent spendin# function in below e?uations
-

R . ;/" Policy< ;E%&%E<
>here G is #overn0ent spendin#" Y 0ean real inco0e" P)&$-# represents institutional policy decisions at all levels of #overn0ent
R ' ;E%&%-<
>here G 0ean #overn0ent e7penditure and G5 represents autono0ous #overn0ent e7penditure% Both the e?uations show that #overn0ent e7penditure can
only be depended on fiscal policy decisions rather than they cannot be deter0ined by real inco0e level in the econo0y%
Accorin# to 2ipsey and )ourant ;&JJH< the #overn0ent has so0e tar#et level of GDP" it can use its ta7es and e7penditures as instru0ents to push the econo0y
towards that tar#et% Suppose the econo0y fall in serious recession" the re0edy to #et out fro0 recession is that the level of national inco0e be increase by the
#overn0ent@ the #overn0ent can increase its e7penditure or lower ta7 rates or both% If the econo0y is overheated" the #overn0ent can utili*e its fiscal 0uscles
and increase the ta7 rates or reduce e7penditures or do both thin#s si0ultaneously in order to depress the level of national inco0e%
9o ta7 the citi*ens is one of the 0a1or functions the 0ana#e0ent of a country has been ta:en% the inco0e collected by this e7ercise is then supposed to be used
for 0any purposes" that 0ay be include the runnin# of ad0inistration of #overn0ent itself" provision of law 8 order" defence of the country" and for societal
i0prove0ent and infrastructure% By utili*in# this revenue" they can construct road and rail networ:" educational centre" sanatoriu0" da0s and other services for
its people% !or all these purposes" #overn0ent raises revenue fro0 those who 0a:e profits" fro0 one source or another" within that country%
(




&
See Pa:istan 6cono0ic Survey E''J-E'&' ;6cono0ic and Social Indicators<
E
See A#arwal" +% S ;E''J< pp% &&'&
-
See !arnha0" P% % ;E''.< pp% -.H--.I
(
See ^aidi" S% A ;E''.< pp% &JH
T
VOLUME NO. 1 (2011), ISSUE NO. 5 (SEPTEMBER) ISSN 2231-4245
INTERNATIONAL JOURNAL OF RESEARCH IN COMMERCE, ECONOMICS " MANAGEMENT
A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories
www%i1rc0%or#%in
&.
EMPIRICAL STUDIES
After identify the clear relationship between fiscal policy and econo0ic #rowth in 0ana#in# and i0provin# the #rowth" we #o throu#h e0pirical literatures that
investi#ate associations a0on# the0 in enhancin# econo0ic #rowth%
Martin and !ard0anesh ;&JJ'< e7a0ined the perfor0ance a0on#st the :ey tools of fiscal policy and econo0ic #rowth ;RGDP< by 0eans of a reduced-for0
0odel and they were ta:en a IH sa0ple si*e of developin# and developed countries ;cross-sectional data< that start fro0 &JIE to &JG&% Spendin#" deficits" ta7es"
non ta7 revenue and share of #ross fi7ed capital for0ation in GDP are considered% Multiple re#ression analysis was used% 9he e0pirically found that ta7es #ive
the i0pression of ne#atively lin:ed with #rowth@ #overn0ent spendin# and #rowth #o in the sa0e direction further they found that there is a stron# opposite
contact found between fiscal deficit and #rowth% As ta7es loo: har0fully lin:ed with the #rowth of #ross do0estic product" nevertheless" they are positively
lin:ed with rate of econo0ic #rowth when their benefit is observed in reducin# deficits% 9he other side of the findin#s is that the lin: between #ross do0estic
product #rowth and #overn0ent spendin# is cause to be har0fully opposite if they are observed with deficits% GDP #rowth is associated differently on ta7 share"
#overn0ent spendin# in DP and bud#et deficit because this is decided by their PCI ;low" 0iddle and hi#h inco0e countries<% It is reco00ended that a #eneral
policy should not be for0ulated for all countries because #rowth depends on country precise aspects%
6asterly and Rebelo ;&JJ-< were investi#ated the re#ularities of fiscal policy" the develop0ent level" and #rowth rate e0pirically% 9hey wor: on yearly fiscal data
of &'' countries startin# fro0 &JI' to &JGG by adoptin# the cross-section re#ressions 0ade accepted by the wor: of Barro ;&JJ&< and annual historical data of
twenty-ei#ht countries startin# fro0 &GI' till &JGG% overn0ent revenue" #rants" #overn0ent e7penditure" public invest0ent" per capita inco0e" per capita
DP #rowth rate" ratio of private invest0ent to DP" central #overn0ent surplus" consolidated public surplus" pri0ary enroll0ent" secondary enroll0ent"
assassinations per 0illion" revolutions and coups" war casualties per capita" 0ar#inal inco0e ta7 rate" individual inco0e ta7es" do0estic ta7es" and international
trade ta7es are considered% )orrelation and 0ultiple re#ression techni?ues were used% 9hey discover four thin#s@ !irst is that the level of develop0ent and fiscal
arran#e0ents is stron#ly associated with each otherB low inco0e countries and developed countries purely depend on ta7es i0pose on international trade and
ta7es i0pose on inco0e respectively% Secondly" the level of econo0y 0easured by its people can be affected the fiscal policy% 9hirdly" co00unication and
transport3s invest0ent is si#nificantly connected with econo0ic #rowth and lastly" e0pirically it is difficult to separate out the connection of ta7ation%
Devara1an" Swaroop" and ^ou ;&JJH< were wor:ed out to investi#ate the co0position of public e7penditure and econo0ic #rowth with the help of twenty-year
ti0e series data of forty-three developin# fro0 &JI'-&JJ'% !ive-year forward 0ovin# avera#e of per capita real GDP was included as dependent variables
whereas share of total #overn0ent e7penditure ;current" develop0ent" defense" health" education" transportation an co00unication< in GDP" pre0iu0 in the
blac: 0ar:et for forei#n e7chan#e" e7ternal shoc:s and public e7penditure vector are considered as independent variables% Multiple re#ression techni?ue was
used% 9hey e0pirically found that the non-develop0ent spendin# and econo0ic #rowth has statistically positive and considerable relationship% rowth in per
capita and capital co0ponent of public spendin# was oppositely related with each other% It is concluded that the usa#e of productive spendin# beco0es
unproductive if they are used in e7cess% It 0eans that at the cost of non-develop0ent spendin#" the #overn0ent of developin# countries 0isallocates the public
e7penditures on the side of capital e7penses%
I?bal and ^ahid" ;&JJG< e0pirically wor: on the 0acroecono0ic deter0inants of econo0ic #rowth in the conte7t of Pa:istan by usin# the data of period &J.J-H'
to &JJH-JI% P)I #rowth" DP #rowth" pri0ary school enrol0ent" secondary school enrol0ent" other institutions enrol0ent" physical capital stoc:" bud#et deficit"
e7port" i0port" and forei#n debt are considered% Multiple re#ression analysis was adopted% 9hey find that pri0ary school enrol0ent increases #rowth% 2i:ewise"
0ountin# the stoc:pile of physical capital will positively push #rowth% Both the output variables of #rowth ;PCI #rowth and RGDP #rowth< are har0fully
associated with fiscal deficit% !orei#n debt reduces #rowth% PCI is ne#atively correlated with #rowth% It is reco00ended that that pri0ary education is a vital
re?uire0ent for boostin# #rowth so it should be provided% 9he e7peri0ental outco0e in addition su##ests that if there is need to encoura#e #rowth" the
econo0y of Pa:istan should be open% 9o fundin# the #rowth" Pa:istani resources are 0ost e7cellent option rather to #ive loan fro0 forei#n side and to achieve
stable #rowth the policy 0a:ers should for0ulate #rowth friendly and lastin# fiscal policies%
=neller" Bleaney" and e00ell ;&JJJ< e7a0ined a study to find out the contact between fiscal policy and econo0ic #rowth with respect to the countries of
O6)D% 9hey conduct their research on the assu0ption that the tools of fiscal policy that is ta7 collection structure and e7penditure 0ay have a si#nificance role
in the #rowth of an econo0y 9hey ta:e annual panel data set fro0 &JI' to &JJ. ;EE O6)D countries< and then convert into .-year avera#es to re0ove business
cycle i0pacts% 9hey cate#ori*ed the variables of fiscal into distortionary" non-distortionary ta7ation" and productive" unproductive e7penditures" other revenues
and other e7penditures% Bud#et surplus" DP P) #rowth" initial DP per capita" invest0ent" labor force #rowth and lendin# 0inus repay0ents are used% Multiple
re#ression techni?ue was used% 9hey e0pirically found that" non-distortionary ta7es and unproductive e7penditures have *ero i0pact on #rowth@ productive
e7penditures and econo0ic #rowth are positively associated" and distortionary ta7es and econo0ic #rowth are ne#atively correlated% It is su##ested that with
&L of GDP" either increasin# spendin# on productive side or cut in distortionary ta7es can play role in enhancin# the #rowth rate by '%& to '%E percent annually%
=neebone and Mc=en*ie ;&JJJ< find out the choices of )anadian policies in which )anadian #overn0ent try to reduce the bud#et deficits at federal and
provincial levels fro0 the period of &JHE to &JJH% 9hey ta:e -I-year data of &' provinces and a federal #overn0ent% Pro#ra0 spendin#;S<" ta7 revenue;R<"
provincial une0ploy0ent rate ;4R<" and 9S and 9R as province-specific" non-linear trends derived by applyin# the +odric:-Prescott filter are considered% 9hey
adopted a 0ethodolo#y to differentiate the discretionary and non discretionary ad1ust0ents in provincial and federal fiscal policy that su##ested by Blanchard
;&JJ-<% It is concluded that discretionary fiscal policies in )anada that increases deficits were e7penditure oriented and those policies that decreases the deficits
were due to 0ore balance ;ta7 enhance0ent and spendin# decreases< efforts% !ro0 &JHE to &JJE" the fiscal retrench0ents was 0ade by a balance between
reduce in pro#ra0 e7penditures plus increase revenue" but fro0 &JJ--JH it is ?uite interestin# that reduction in fiscal deficit was due to choices in discretionary
policies by 0eans of cuts in e7penditures pro#ra0% 9hus" deduction in deficit ;fiscal retrench0ents< was due to a balanced policy whereas incre0ent in deficit
;fiscal e7pansions< was differentiated by an unbalanced 0ethod that preferably increases the e7penditure% It is reco00ended that to reduce deficits" cuts in
e7penditure is #ood rather than to increase the revenue%
2in and 2iu ;E'''< investi#ated on whether the fiscal decentrali*ation that ta:es place in 0id-&JG' has had any contribution to the #rowth process of the )hinese
econo0y% Multiple re#ression techni?ue was adopted by ta:in# .-( sa0ple si*e data fro0 EG of the -' provinces fro0 the ti0e period of &JI' to &JJ-% Per
capita GDP #rowth rate" rural population" total population" relative prices of far0 products to nonfar0 products" share of $on-SO6sP output in the total
industrial output" #rowth rate of per capita fi7ed asset invest0ent" the avera#e retention rate of locally collected bud#etary revenue" household responsibility
syste0" fiscal capacity and fiscal decentrali*ation was 0easured as the 0ar#inal retention rate of locally collected bud#etary revenue are considered as
variables% 9hey e0pirically found that fiscal decentrali*ation was increased the )hinese econo0y% !urther0ore they discover that rural chan#e" capital a0assin#"
and non state sector enlar#e0ent were the answer in drivin# forces of the econo0ic #rowth in )hina over the past E' years% 9hey also conclude two thin#s% !irst
is that institutional plannin# 0atters% More to the point fiscal decentrali*ation" additional refor0s ;the fa0ily dependability syste0 in the rural se#0ent plus the
Kprivati*ationK of the industriali*ed division by 0eans of 0ountin# the private enterprises< have been also contributin# econo0ic #rowth in )hina% Second was"
as to the data situate" fiscal decentrali*ation has 0ove up the e7pansion speed in )hina 0ostly by hu0ani*in# the effectiveness of resource allot0ent so0ewhat
by stir up 0ore invest0ent%
Don#" 9aylor" and /_cel ;E''-< #o throu#h an e0pirical research to investi#ate the lin: between 4%S econo0y #rowth and fiscal policy by ta:in# 0onthly ti0e
series data fro0 &JG- to E''E of fiscal indicators into consideration% 9he ob1ective is to assess unanticipated confi#uration shoc: of fiscal tools to chec: the lin:
a0on#st spendin#" ta7es and fiscal deficits by holdin# other thin#s constant% $onfar0 e0ploy0ent" GDP deflator" federal fund rate" federal e7penditure"
receipts ;ta7es< and deficits are considered% 9hey assess shoc:s to 0ore than one variable si0ultaneously by adoptin# 0ethodolo#y of value at ris: ;5AR<% 9hey
ar#ued that if the volu0e of federal #overn0ent increases" it will di0inish the #rowth of econo0y% About 4nited States econo0y three wide findin#s were
concluded@ first of all" consistent cuts in the rate of 1ob results when #overn0ent increases their e7penditures or ta7 revenue% $e7t" an unreliable predictor of
econo0y is fiscal deficits% 2astly" they conclude that the consistent predictor in fiscal policy is ta7 revenue%
VOLUME NO. 1 (2011), ISSUE NO. 5 (SEPTEMBER) ISSN 2231-4245
INTERNATIONAL JOURNAL OF RESEARCH IN COMMERCE, ECONOMICS " MANAGEMENT
A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories
www%i1rc0%or#%in
&H
A0an1a and Morrissey ;E''.< were conducted a research study to assess the perfor0ance of fiscal policy in =enya by ta:in# ti0e series annually data fro0 &JH(
to E''E% 9hey cate#ori*ed the fiscal data accordin# to their attitude that are productive #overn0ent spendin#" unproductive #overn0ent spendin#" inco0e ta7
;distortionary revenue<" indirect ta7 ;non distortionary revenue<"non-ta7 revenue" bud#et deficit" real per capita inco0e" pri0ary and secondary enrol0ent
;hu0an capital<" #overn0ent invest0ent" private invest0ent" #rants" real GDP" and no0inal GDP are considered% Autoa##ressive distributed la# ;AD2<"
cointe#ration" and causality analysis techni?ues were used% 9hey e0pirically concluded that fiscal policy 0atters for econo0ic #rowth% 4nproductive spendin#
and non-distortionary ta7 revenue have no i0pact to #rowth as forecast by econo0ic theory% Productive e7penditures have ne#ative i0pact on econo0ic
#rowth% $o distortionary influence of distortional ta7 was found on #rowth% Private invest0ent and hu0an capital have #ood i0pact in favor of PCI% )onversely"
in the lon# run econo0ic #rowth and #overn0ent invest0ent #o in the sa0e direction and are positively correlated% Real PCI of =enya are shaped by productive
consu0ption spendin# and invest0ent by #overn0ent% rowth 0ove stron#ly ne#atively by productive consu0ption e7penses while enhance0ent in the
invest0ent by #overn0ent brin# econo0ic #rowth and private invest0ent positively up% It is reco00ended that the #overn0ent of =enya should reduce
unproductive spendin# and increase public invest0ent%
upta" )le0ents" Baldacci" and Mulas-ranados ;E''.< investi#ate that durin# &JJ's" the countries that have low inco0e" how the fiscal consolidation 8
spendin# co0position associate with econo0ic #rowth by analy*in# -J countries data% Per capita RGDP #rowth" bud#etary balance" current spendin#" do0estic
financin#" e7ternal financin#" initial level of pri0ary and secondary enrol0ent rates " labor force" initial level of GDP per capita" private invest0ent ratio" ter0s of
trade" public sector wa#es and salaries" e7penditures on other #oods and services" transfers and subsidies" interest pay0ents" capital spendin#" ta7 revenue"
#rants and nonta7 revenue are used% Multiple re#ression and correlation techni?ues are used% 9hey e0pirically conclude that" in industrial countries" reduction
in fiscal deficit increases #rowth in both periods% Deficits financin# fro0 do0estic sources enhance #rowth rates% In the short as well as in lon# run" hi#h
bud#etary balances and econo0ic #rowth are usually stron#ly positively related% >hat approach is adopted for public spendin# is also 0atters for econo0ic
#rowth% 9he countries in which spendin# is consider on salaries shows lower #rowth" at the sa0e ti0e as those countries that assi#n 0ore part of their spendin#
on capital and non salaries #oods and services benefit fro0 0ore rapidly output e7tension%
)astro and hernande* de )os ;E''G< was conduct a research study in the case of Spain re#ardin# the econo0ic results of fiscal policy on econo0ic issues by
ta:in# ?uarterly records on public spendin#" ta7es ;net<" RGDP" deflator of #ross do0estic product" pri0ary bud#et balance" public revenues net of transfers"
public invest0ent" su0 of public consu0ption and real rate of interest char#ed on --year #overn0ent bonds co0prisin# fro0 &JG' to E''(% 9hey esti0ated the
shoc:s of fiscal e7o#enous policy on 0a1or 0acroecono0ic variables with the help of value at ris: ;5AR< 0ethodolo#y% 9hey e0pirically concluded that output
and e7pansionary shoc:s of spendin# are #o to#ether in the sa0e direction in the short run at the cost of #overn0ent deficits and inflation that is hi#her and
lower output in the inter0ediate and len#thy run% Incre0ent in the econo0ic activity occurred if ta7 si*e increases in the inter0ediate run whereas non-
per0anent e7pansion in public bud#et balance re?uired% Spot the conclusion in Spain fro0 the &JJ's by i0ple0entations of this analysis of fiscal policy is that in
#rowth of productivity" the techni?ues of consolidation not appear that they have any costs involved but it positively contribute in GDP #rowth in so0e periods%

MODELING FRAMEWORK
After reviewin# the past literature on fiscal policy and econo0ic #rowth" the followin# 0odels are developed to investi#ate the role of fiscal policy in enhancin#
the #rowthB
t
FD LGDP + + =
1 0
;-%&<
t
PNTXR PTXR FNTXR FTXR LGDP + + + + + =
4 3 2 1 0
;-%E<
t
DE CE LGDP + + + =
2 1 0
;-%-<
67penditures" revenues and fiscal deficit are included in the re#ression 0odel as independent variables whereas lo# of #ross do0estic product is included as
dependent variable" LGDP represents lo# of real #ross do0estic product that represent the value ;in 0onetary< of the entire finished co00odities and services
produced within a country by ta:in# a base year ;Siddi?ui" E''&<" CE represents current e7penditures which included all those e7penditures that are consu0ed
on services within a year% DE represents develop0ent e7penditures that are spend on durable ite0s that yields services over a lon# ti0e" for e7a0ple
e7penditures on construction of da0s" radar stations" and infrastructure ;Rosen" E''J<% Si0ilarly ;TAR 0eans federal ta7 revenue" ;NTAR represent federal non
ta7 revenue% PTAR 0eans provincial ta7 revenue" PNTAR 0eans provincial non ta7 revenue" and ;D representin# fiscal deficit% Annually ti0e series data fro0
&JGE to E'&' has been #athered fro0 secondary sources as underB
Statistical Supple0ent of 6cono0ic survey of Pa:istan
!ederal Board of Revenue of Pa:istan ;!BR<

ESTIMATION AND RESULTS
TABLE 1: DETERMINANT OF ECONOMIC GROWTH
V1;51J?7* C97885<5724* 4-*4140 P-V1?C7
)onstant E%&- EJ%-J '%''
!D '%-- &'%EG '%''
Ad1% R
E
'%G' !-Stat% &'.%I.
D%>

&%HE Prob% '%''
SourceB Author3s 6sti0ations
9able & shows the output of statistical test% >here ;D ;used as a pro7y of fiscal policy
.
< has si#nificant and positive i0pact on the econo0ic #rowth% 9he
coefficient value of ;D shows that if there is an increase in the ;D" there will be an increase in econo0ic #rowth by '%-- ti0es% )ochran Orcutt iterative
procedure
H
was adopted to correct the autocorrelation and the (-3+&!e and ;-s+s% of serial correlation LM test are '%EE and &%H' respectively%
After evaluatin# the affect of fiscal deficit on #rowth" they are further divided and analy*ed as #overn0ent revenue and e7penditure in the followin# sectionB

TABLE 2 DETERMINANT OF ECONOMIC GROWTH
V1;51J?7* C97885<5724* 4-*4140 P-V1?C7 VIF
)onstant H%IG HE%J' '%'' -
!9`R -&%-. -&%'G '%EG (%&&
P9`R -I&%-H --%H. '%'' E%-.
!$9`R (%.I E%I( '%'& -%(&
P$9`R EG%HH (%'( '%'' E%EE
Ad1% R
E
'%IJ !-Stat% EI%EE
D%> &%'& Prob% '%''
SourceB Author3s 6sti0ations

.
See Ali" Iru0 and Ali ;E''G<
H
See )ochrane and Orcutt ;&J(J<
VOLUME NO. 1 (2011), ISSUE NO. 5 (SEPTEMBER) ISSN 2231-4245
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9able E shows the output of ordinary least s?uare 7OLS8 procedure% In above analysis" the PTAR" PNTAR and ;NTAR are si#nificant whereas the federal ta7
revenue is insi#nificant% 9he DW is &%'& and the (-3+&!e and ;-s+s% of serial correlation LM test are '%EG and &%-( respectively%

TABLE DETERMINANT OF ECONOMIC GROWTH
V1;51J?7* C97885<5724* 4-*4140 P-V1?C7 VIF
)onstant '%E( &&E%.E '%'' -
)6 '%'I '%IH '%(. &%-I
D6 '%-I E%G& '%'& &%-I
Ad1% R
E
'%E' !-Stat% (%E&
D%> E%(J Prob% '%'-
SourceB Author3s 6sti0ations
9he above table - shows deter0inant of econo0ic #rowth% 9he p-value of current e7penditures is above '%'. that is '%(. that indicates that the current
e7penditures are insi#nificant in the re#ression 0odel and have no contribution in boostin# econo0y% >hereas the p-value of develop0ent e7penditure is below
'%'. that is '%'& so the DE is si#nificance in the 0odel% If the bud#et si*e of DE 6$&& $,-*e+se" they will boost the #ross do0estic product by '%-I% )ochran Orcutt
iterative procedure was adopted to correct the autocorrelation and the (-3+&!e and ;-s+s% of serial correlation LM test are '%E- and &%.( respectively%

CONCLUSION AND RECOMMENDATIONS
9his research study investi#ates the role of fiscal policy in 0ana#in# econo0ic #rowth in the fra0e of Pa:istan by ta:in# the annual ti0e series data fro0 the
period fro0 &JGE to E'&'% Ordinary least s?uare ;O2S< procedure has been applied% overn0ent revenue and e7penditure account are considered% Revenue
account is disa##re#ated into federal and provincial level whereas e7penditures are bro:en down into current and develop0ent e7penditures% 9he result shows
that federal ta7 revenue and provincial ta7 revenue are ne#atively contributed to econo0ic #rowth% 9his 0ay be happened for two possible causes@ one reason is
our ta7 ad0inistration is e7tre0ely corrupted and 0ost of the ti0e they are involved with and support the ta7 liable persons not to pay the ta7 a0ount for the
sa:e of the0selves and ille#ally ta:e 0oney and hide the inco0e data of ta7 payers% Secondly" the a#riculture sector is free fro0 ta7 because the bi# fishes who
are involved with a#riculture sector are really clever and fully trained not to pay ta7 and hide inco0e accounts fro0 the ta7 depart0ent and also benefited fro0
#i#antic political control% 6ven above G'L parlia0ent 0e0bers are fro0 the feudal class or are the supporter of this #roup
I
% >hen we 0ove on e7penditure side
of fiscal policy" the non-develop0ent e7penditure is not si#nificant for the reason that the #overn0ent not appropriately spends 0oney on this side% Only
develop0ent e7penditure found si#nificantly contributed in econo0ic #rowth% +ence" it is i0perative to cautiously spend the resources on current e7penditure
and spend as 0uch as possible on develop0ent pro1ects to increase the speed of econo0ic #rowth of Pa:istan%
At last after analy*in# the e0pirical results" are that there is a stron# relation e7ist between econo0ic #rowth and fiscal policy therefore the policy 0a:ers of
Pa:istan should for0ulate their polices after carefully considerin# fiscal policy variables%
9he ta7 structure of Pa:istan is based on &JI- )onstitution in which they outline the ta7es and duties in federal le#islative list
G
" the federal and provincial
#overn0ent can collect fro0 assessee only fro0 these ways% After analy*in# the results" the ta7 syste0 of both federal and provincial #overn0ent 0ust be
restructure to 0a:e the0 positively correlated with the econo0y because they are oppositely contributed in the #rowth as concluded by our study3s results%
Both sources of revenue ;ta7es and non-ta7es< 0ust be positively contributed in 0ana#in# econo0ic #rowth of Pa:istan because Pa:istan is not financial so
stron# that they not only rely on 1ust non-ta7 source% 9he fiscal policy 0a:ers 0ust have to rethin: about the structure of ta7es i0posed on assessee when they
are for0ulatin# and i0ple0entin# fiscal policy% 9here is an ur#ent need to 0a:e a lar#e part of non ta7 revenue in collectin# total revenue% In contrast"
#overn0ent should focus 0ore on develop0ent e7penditures li:e spendin# on da0s" roads" ports etc% 9he advanta#es fro0 this type of spendin# are lon# ter0
and #rowth oriented% On the other hand" #overn0ent should avoid 0uch spendin# on current e7penditures% 9he current e7penditure are of two types@ necessary
current e7penditure li:e pensions" salaries" law and order" defence etc should not reduce because these are necessary to our econo0y and sustainability but un-
necessary current e7penditure li:e purchasin# of bullet-proof vehicles for 0inisters personal use" un-necessary 0ove0ents of 0inisters convoy fro0 one place
to another should reduce because those visits re?uire 55IP protocols for security purpose at the e7pense of ta7payers" the royal e7penses of our 0inisters etc
because a0ount spend on these types of e7penditures will have no si#nificant affects on econo0ic #rowth% 67penditures on non-develop0ent pro1ects should
be reduced and their a0ount should be spend on lon# ter0 pro1ects as they were e0pirically identified as #rowth oriented in this study%

AREA FOR FURTHER STUDY
In this paper the #overn0ents e7penditures are not disa##re#ate into federal and provincial level so the new study will be conducted and 0ore deeply
reco00endations and su##estions will be drawn with respect to fiscal policy and econo0ic #rowth of Pa:istan if they are divided as described%

ACKNOWLEDGMENT
I a0 very #rateful to Mr% 9ehseen Jawaid" 2ecturer" IYRA 4niversity" ulshan )a0pus" Pa:istan for their valuable co00ents and su##estions on this research
paper%

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INTERNATIONAL JOURNAL OF RESEARCH IN COMMERCE, ECONOMICS " MANAGEMENT
A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories
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