The Causality between Revenues and Expenditure of the Federal and Provincial Governments of Pakistan

Abstract

Large fiscal deficits and a growing debt burden have been a key element of the structural problems faced by the economy of Pakistan. During the last three years, for example, the budget deficit has averaged almost 6 percent of the GDP and the public debt has approached the level of 60 percent of the GDP. Targets agreed with IMF have been seriously violated and the SBA with the Fund has floundered because of the inability to control the fiscal deficit. There is a growing perception that one of the root causes of inflation is the large borrowing from the Central Bank to finance the deficit. This has resulted in a popular demand for cutting down of unproductive expenditure and observing austerity along with implementation of a strong programme of reforms to raise the low tax to GDP ratio of the country by broad-basing the tax system and eliminating exemptions. The fundamental question is whether measures at reducing the fiscal deficit will have a, more or less, permanent impact. If an increase in tax revenue is accompanied subsequently by a rise in expenditure then the impact on the deficit is likely to be temporary or limited in character. Alternatively, if a cut in expenditure leads to a slackening of the fiscal effort then the gains are also not lasting in nature.