Government revenue and Expenditure Nexus: Empirical Evidence of Pakistan

Abstract

Fiscal policy plays a significant role to acquire price stability, employment opportunities, and output increase. This study has examined co-integration and casual association in components of revenue and expenditure of Pakistan to develop appropriate fiscal policy. This research work focused on two models as a current expenditure (CE) was applied as the dependent variable in model 1 while in model 2, development expenditure (DE) was considered as the dependent variable. In both models, government revenue components such as shortest tax (DT), indirect tax (IDT), and non-tax income (NTR) were applied as independent variables. Secondary time series data from 1979 to 2020 was applied in this research work to check the stationarity of data unit root tests of Philips Peron (PP) and Augmented Dickey-Fuller (ADF) employed. Granger causality and Auto regressive distributive lag (ARDL) approach were applied for the empirical estimation of the study. ARDL bound test shows that co-integration exists in both models. The ARDL approach outcomes indicated as non-tax income, indirect tax, and direct tax have significant a relationship with current expenditure in the long run. Direct and indirect taxes have a significant relationship with development expenditure in the long run. Granger causality test estimates indicated as in both model shortest tax, indirect tax, and non-tax income has no causal relationship with current expenditure and development expenditure. In conclusion, estimates of this research supported the institutional separation hypothesis.