Abstract/Description
The fiscal sector in Pakistan has been facing mule-layered challenges over several years. One of the reasons is the stubborn and unproductive nature of its public expenditure, and the other one is the lower tax revenues. This issue of hovering fiscal deficit is mostly dealt with the tools of fiscal contraction/austerity which can have a potential impact on the private sector of the economy. Thus, the question which has been addressed in this study is whether the Expansionary Fiscal Contraction (EFC) hypothesis holds in case of Pakistan. Fiscal contraction episodes have been identified using growth in the growth rates of functional heads of public expenditure. A non-linear and non-parametric regression technique, Multivariate Adaptive Regression Splines (MARS) has been adopted for the analysis. The overall findings of the study contradict the EFC hypothesis. Furthermore, the study suggests that spending on education, health, and social protection are the major areas that influence private sector activity during the period of austerity. As far as the public policy perspective is concerned, the results suggest that in order to dampen the effects of austerity, the growth of spending in the social sectors must not be decreased.
Keywords
Fiscal contractions, Austerity, Private Investment, Private Credit, Private Consumption, Public Expenditure, Multivariate Adaptive Regression Splines
Location
MCS-3, AMAN-CED, Ground Floor
Session Theme
1A: Competitiveness, Productivity and Growth I
Session Type
Parallel Technical Session
Session Discussant
Anwar Shah, Quaid-e-Azam University (QAU), Islamabad
Start Date
16-11-2023 2:30 PM
End Date
16-11-2023 4:00 PM
Recommended Citation
Irum, A. (2023). Expansionary Fiscal Contraction Hypothesis: An Evidence from Pakistan. CBER Conference. Retrieved from https://ir.iba.edu.pk/esdcber/2023/program/1
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Expansionary Fiscal Contraction Hypothesis: An Evidence from Pakistan
MCS-3, AMAN-CED, Ground Floor
The fiscal sector in Pakistan has been facing mule-layered challenges over several years. One of the reasons is the stubborn and unproductive nature of its public expenditure, and the other one is the lower tax revenues. This issue of hovering fiscal deficit is mostly dealt with the tools of fiscal contraction/austerity which can have a potential impact on the private sector of the economy. Thus, the question which has been addressed in this study is whether the Expansionary Fiscal Contraction (EFC) hypothesis holds in case of Pakistan. Fiscal contraction episodes have been identified using growth in the growth rates of functional heads of public expenditure. A non-linear and non-parametric regression technique, Multivariate Adaptive Regression Splines (MARS) has been adopted for the analysis. The overall findings of the study contradict the EFC hypothesis. Furthermore, the study suggests that spending on education, health, and social protection are the major areas that influence private sector activity during the period of austerity. As far as the public policy perspective is concerned, the results suggest that in order to dampen the effects of austerity, the growth of spending in the social sectors must not be decreased.
