Abstract
The paper examines sustainability of budget deficits and dynamic linkages between government revenues and expenditures in five major South Asian economies, namely India, Pakistan, Bangladesh, Srilanka and Nepal for period 1985-2014. The study contributes to the literature by combining individual-country analysis with recent panel data approaches for robustness of results. Our results support existence of long-run relationship between government revenues and expenditures for the countries in a specification allowing for unknown structural break. The size of slope parameter obtained from Dynamic Ordinary Least Squares is however significantly less than one except for Bangladesh indicating incoherence with ‘strong’ sustainability of deficits. The long run causality analysis lends support to ‘spend-tax hypothesis’ for India, Bangladesh, Pakistan and Srilanka and ‘tax- spend hypothesis’ in case of Nepal. From perspective of design of fiscal consolidation programmes, this implies that adjustment of revenues would be optimal solution to control spending in Nepal while control of expenditure would be effective in case of India, Bangladesh, Pakistan and Srilanka. The results from Pedroni (1999) and Westerlund (2007) panel cointegration tests and block exogeniety and DumitrescuHurlin (2012) panel causality tests are broadly in conformity with the time series results.
Highlights
Maintaining a sustainable fiscal position to ensure macroeconomic and financial stability is currently a key policy issue in both developed and developing economies
This paper aims to examine the issue of sustainability of budget deficits for five largest countries in South Asia namely, India, Pakistan, Bangladesh, Srilanka and Nepal for the period 1985-2014
The study examines the issue of budget deficit sustainability and revenue expenditure linkages for five major South Asian economies for period 1985-2014
Summary
Maintaining a sustainable fiscal position to ensure macroeconomic and financial stability is currently a key policy issue in both developed and developing economies. The case of South Asia deserves particular attention. Given the enormous responsibilities reposed in fiscal policy, fiscal resources available in the South Asian countries are quite meager. Despite an impressive growth performance and reforms aiming at simplification of tax systems, introduction of value added tax during the 1980s and 1990s, the progress in boosting government revenues is slow. Relative to GDP, revenue generation and collection in the region is well below peer standards. Relative to GDP, revenue generation and collection in the region is well below peer standards1 This should not come as a surprise in a conflict-affected country like Afghanistan, but it is happening in the fast-growing Bangladesh and in the relatively wealthier Srilanka
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