Fiscal Consolidation and Economic Growth: Insights from the Case of Pakistan

M. Ali Kemal, Omer Siddique, Ahmed Waqar Qasim

Abstract


The primary objective of this paper is to find whether fiscal
consolidation has positive impact on economic growth in Pakistan or not,
using nonlinear specification. In addition to checking nonlinear
relationship between fiscal deficit and economic growth, we also compute
optimal level of fiscal deficit that enhances growth, using data from
1976 to 2015. The results show that at the current level, fiscal deficit
is positively associated with economic growth but fiscal deficit at a
very high level would be damaging for growth. The nonlinear association
between fiscal deficit and economic growth suggests that Pakistan would
need to keep fiscal deficit in check and keep on practicing fiscal
prudence. The analysis of data reveals that although the fiscal deficit
has come down over the years, capital, or development, expenditures have
also come down. According to the calculations in this paper, the optimal
level of fiscal deficit is 0.74 percent of GDP, implying that Pakistan’s
expenditure composition and tax structure needs to be revisited to
achieve higher economic growth. JEL Classifications: 2SLS Keywords:
Economic Growth, Fiscal Consolidation

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DOI: https://doi.org/10.30541/v56i4pp.349-367

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