Does government expenditure affect tax revenue? A case study of Pakistan
Faculty / School
Faculty of Business Administration (FBA)
Department of Economics
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International Journal of Economic Perspectives
The choice of optimal fiscal policy in developing countries carries critical importance for their economic growth. To reduce budget deficit, economists such as Barro (1974) and Peacock and Wisemen (1979) have long proposed spending cuts, whereas others support either tax increase (Buchanan and Wagner 1977) or tax cut (Friedman 1978). In this paper we attempt to investigate the linkages between government spending and tax revenue in Pakistan during the period 1972-2007. Using ARDL and Error Correction models, we explore these linkages. Moreover, utilizing Toda Yamamoto Granger causality method, we test the validity of Barro's spend-tax hypothesis. Our results show that there is a long run relationship between government expenditure and tax revenue. The results also support Barro's spend-tax hypothesis as the causality runs from government expenditure to tax revenue. Government should, therefore, spend carefully by avoiding unnecessary spending.
Ahmad, N., Ali, S., & Iram, S. (2011). Does government expenditure affect tax revenue? A case study of Pakistan. International Journal of Economic Perspectives, 5 (4), 319-325. Retrieved from https://ir.iba.edu.pk/faculty-research-articles/73