Open AccessFiscal Consolidation and Economic Growth: Insights from the Case of Pakistan
Author(s) -
M. Ali Kemal,
Omer Siddique,
Ahmed Waqar Qasim
Publication year - 2017
Publication title -
pakistan development review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.154
H-Index - 26
ISSN - 0030-9729
DOI - 10.30541/v56i4pp.349-367
Subject(s) - economics , consolidation (business) , fiscal deficit , fiscal policy , deficit spending , macroeconomics , prudence , fiscal imbalance , fiscal union , monetary economics , finance , debt , philosophy , theology
The primary objective of this paper is to find whether fiscalconsolidation has positive impact on economic growth in Pakistan or not,using nonlinear specification. In addition to checking nonlinearrelationship between fiscal deficit and economic growth, we also computeoptimal level of fiscal deficit that enhances growth, using data from1976 to 2015. The results show that at the current level, fiscal deficitis positively associated with economic growth but fiscal deficit at avery high level would be damaging for growth. The nonlinear associationbetween fiscal deficit and economic growth suggests that Pakistan wouldneed to keep fiscal deficit in check and keep on practicing fiscalprudence. The analysis of data reveals that although the fiscal deficithas come down over the years, capital, or development, expenditures havealso come down. According to the calculations in this paper, the optimallevel of fiscal deficit is 0.74 percent of GDP, implying that Pakistan’sexpenditure composition and tax structure needs to be revisited toachieve higher economic growth. JEL Classifications: 2SLS Keywords:Economic Growth, Fiscal Consolidation