DefinePK

Abstract

The underlying literature-based analysis of the relationship between public debt and government expenditure and revenue, adheres to the empirical evidence around the world, and attributes it to the Pakistani fiscal environment. International literature has recognized divergent fiscal behavior amongst countries: the developed countries tend to be characterized by a tax-spend behavior where fiscal behavior is highly institutionalized and the cycles have emerged, developing countries have displayed a spend-tax or fiscal synchronization where revenue systems are weak together with high reliance on tax-borrowing. Multiple studies of Africa, Asia, and East-European countries disclose various directions of causality between fiscal variables, giving little attention to the role of the individual approaches to the triadic relationship in the direction of public debt. Using Pakistan as a case study, the analysis reveals that fiscal imbalance is persistent due to repetitive expenditure as well as ineffective tax collection and a higher level of debt. Much evidence supports that Pakistan exhibited fiscal behavior consistent with both spend-tax and fiscal synchronization hypotheses with debt being utilized more and more as a funding tool and less as a countercyclical cushion. The paper points out structural inefficiencies and weaknesses of institutions that impede the fiscal sustainability by putting the fiscal dynamics of Pakistan in the context of the global discussion. The analysis in the case of Pakistan shows deep-rooted fiscal imbalances that have been caused by long-standing expenditures, poor tax collection and even increased debt servicing, which are reflective of other developing countries in this respect. Pakistan fiscs cycle indicates the spend-tax inclinations as well as a low level of fiscal coordination which leads to a reactive policy structure. Thus, the paper suggests that a rules-based fiscal framework should be adopted, tax base should be broadened using politically viable reforms, constraining spending that is not productive, and gearing borrowing more closely towards revenue performance. The conclusion points out that if there are no structural changes, the fiscal risks of Pakistan will not diminish. The long-term fiscal sustainability needs to be achieved via the coordination of the policy, enhancing the capacity building, and transitioning to the direction of growth-based public investment rather than short-term borrowing.