Fostering Economic Growth through Effective Fiscal Policy in Developing Economy

Abstract

The instruments of monetary policy, such as taxation and expenditure, are commonly used around the world to guide the economy in a more prosperous path. However, in Pakistan, the distribution of public revenue between productive and non-productive expenses, as well as the effect on economic development, are not well researched. At the country level, this study looks at the role of economic governance in the partnership between public expenditure, private investment, and economic development. The study uses Johansen co-integration, error correction test, and Impulse Response Function to examine the dynamic relationship between government revenue, productive and non-productive expenditure, and economic growth and sustainability from 1980 to 2018. The study's results indicate that fiscal instruments and economic development in Pakistan have a significant long-term and short-term relationship. Furthermore, the impulse response indicates that when direct taxes are higher than GDP, both productive and unproductive expenses grow. Some unproductive investments have also been found to pave the path for economic development. The government should take measures to raise revenue via taxation in order to properly enforce fiscal policies in the future and achieve sustainable growth and development. Tax revenues will be strengthened by allowing efficient use of tax proceeds and reminding people that paying taxes is a duty, not a punishment.