An Empirical Analysis of Fiscal Policy Hypothesis: Finding the Most Suitable for Pakistan?
The paper examines the correlation between government revenue and expenditure in Pakistan. Fiscal policy plays a vital role in the economic development of an economy. Moreover, fiscal regulation on other actions is important to provide and nourish fiscal discipline for a true policy action. In order to plan fiscal regulations for a country, reduction in public expenditure would be coupled with other important variables. The present study is designed to test the appropriate fiscal policy hypotheses for Pakistan among the following mentioned hypotheses: Tax-and-expenditure by both Buchanan & Wagner (1978) and Friedman (1978); the expenditure-and-tax proposition (Lincoln, 1979); the fiscal harmonization (Islam, 2001); and hypotheses of many factors by Baghestani and Mc-Nown (1994). For data treatment, the co-integration VAR (Vector Auto-regression) model along with Granger causality test was used. The results suggest that uni-directional causality from expenditure to tax proceeds. It also confirms the spend-and-tax hypothesis for fiscal regulation in Pakistan during 1980-2013. Consequently, uni-directional causality running from expenditure to tax proceeds. Government expenditure restraints should be established to control deficit and dipping expenditure. It is an attractive clarification as compared to enhancing tax to attain optimum financial regulation in the country. The study will help policy makers to attain fiscal discipline in the country.