The Effects of Fiscal Policy on Economic Growth: Empirical Evidences Based on Time Series Data from Pakistan

Shahid Ali, Naved Ahmad


Fiscal policy refers to government‟s efforts to influence the
direction of the economy through changes in taxes or expenditures.
Optimal fiscal policy in Pakistan and in other developing countries
plays a pivotal role in growth process and, hence, serves as a vital
instrument for economic growth. The efficacy of fiscal policy in
improving economic conditions in the long run is, however, a
controversial issue and needs further investigation. In conventional
model, a federal tax cut without a corresponding reduction in federal
expenditures will encourage consumption expenditures and interest
earnings due to increase in personal disposable income. Contrarily,
according to Ricardian Equivalence Theorem (RET), the same change in
fiscal policy will not result in any of the above mentioned
macroeconomic impacts. In other words, a reduction in deficit-financed
federal tax cut will not affect macroeconomic outcomes [Saxton

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