Daily Times

The relationship between the budget deficit and economic growth in Pakistan determines that whether there exists a threshold level of fiscal deficit that might serve as a benchmark for policymakers aiming to promote growth through fiscal expansion. However, there is room for fiscal policy to promote growth, provided the deficit is kept below the threshold level and public spending is channelled into productive investments that raise the country’s long-term growth potential.

The role of the fiscal deficit in economic growth has been debated extensively in the literature. Studies based on the neoclassical school of thought argue that the fiscal deficit impedes economic growth by putting pressure on the interest rate on the back of increased government borrowing, which then crowds out private investment.

An expansionary fiscal policy leads to a decrease in government savings, which increases the desired private savings. As a result, the desired national saving does not change at all.

Some economists think that the budget deficit helps in the growth of the economy if it is due to productive expenditures.

Consequently, the real interest rate does not have to rise to maintain a balance between national savings, investments, and consumption, leaving the overall output unchanged. The empirical evidence on the impact of the fiscal deficit on economic growth is inconclusive.

Pakistan’s economy has two notable features. First, despite a historical average growth rate of over five percent, it has experienced numerous ups and downs in its economic performance, with high growth periods followed by invariably sharp slowdowns. Second, these high growth (low growth) periods have been recently characterized by lower (higher) levels of fiscal deficit.

Effective macroeconomic management is directly seen to pave the way for growth-induced employment generation and poverty reduction. For long-run economic growth, a balanced budget is required. If a country is facing the issue of budget deficit it means that the level of public saving is negative, which in turn is harmful to economic growth.

Some economists think that the budget deficit helps in the growth of the economy if it is due to productive expenditures like financing education, health etc. Whereas other economists disagree and state that a budget deficit is harmful to the economy in any case.

They agree with neoclassical economies. Increased budget deficit gives rise to macroeconomic problems. These problems include an increased level of inflation and debts in the economy, a deficit in the current account and reduced economic performance. Since Pakistan is experiencing a huge budget deficit in the current years, this is the reason fiscal policy has a very important role in its economic performance. Furthermore, positive reforms regarding fiscal matters may improve the economic performance and can break the continuity of the budget deficit, that Pakistan is experiencing.

The reason behind the huge budget deficit is the hyper increase in the dependency of the country on external resources (in the forms of loans, and other aids). These loans are sought from the donors to service the debts, which ultimately further enhance the budget deficits and hence, the deficit continues to rise, year by year.

In the case of Pakistan, the country has been facing this adverse situation of budget deficit for many decades. There are many reasons behind this. First, it is evident from economic history that the process of revenue generation, ie tax collection, is very poor. The ratio of indirect taxes is higher than the direct taxes and more than half of the population is not paying tax which is the only source of revenue generation. The tax GDP ratio stood at around 11.5 percent during the last several years.

It is mainly attributed due to the narrow tax base, inelastic tax system, complex tax laws, heavy reliance on foreign trade taxes, and large tax exemptions and incentives. All these facts created the situation of budget deficit. The government should take some remedy measures to overcome the problems which will be helpful to reduce the deficit of Pakistan.

As the lender interest rate in Pakistan is very high, that is why very few investors mostly invest and few employment opportunities are there, to increase the investment ratio in GDP government must decrease the interest rate that small investors can invest, due to this the government revenues can increase. Government should increase the ratio of direct taxes, more taxes from the rich and less from the poor should be attained. There should be proper allocation of these revenues.

Sustaining a trade balance is also key to removing the budget deficit. Government official parliamentarians should reduce their expenditure as much as they can. More than 50 percent of the revenues are utilized on these expenditures and it increases the budget deficit in return.

The variables which are used in this study highlight the budget deficit problem, which is also very useful in this context that policymakers can use these variables to remove the budget deficit problem increasing the sustainability and growth of the country.

The writer can be reached at aimenaziz2002@gmail.com