Fiscal Policy and Public Debt: Evidence from Pakistan

Abstract

This study provides a comprehensive empirical analysis of the dynamic relationship between fiscal policy and public debt sustainability in Pakistan from 1990 to 2023. It investigates the long- and short-run impacts of government expenditure, taxation, and fiscal deficits on the nation's escalating debt burden. Employing a quantitative research design and advanced econometric techniques, including the Auto-Regressive Distributed Lag (ARDL) model, the research utilizes robust time-series data from the State Bank of Pakistan, World Bank, and IMF. The findings reveal that persistent fiscal deficits are the primary driver of public debt accumulation, exhibiting a strong positive correlation. Furthermore, while tax revenue enhancements demonstrate a limited stabilizing effect in the short run, their role in ensuring long-term debt sustainability is critical. The analysis identifies a structural imbalance, with recurrent government expenditure, particularly on debt-servicing and non-developmental sectors, crowding out productive investment and exacerbating fiscal fragility. The study concludes that Pakistan's fiscal policy has historically prioritized short-term political and economic objectives, inadvertently fuelling a debt-deficit spiral and compromising long-term macroeconomic stability. Consequently, the research strongly advocates for deep-rooted structural reforms, including a significant broadening of the tax base, strategic rationalization of public spending towards development projects, and the institutionalization of fiscal discipline through enhanced governance and transparency. These measures are imperative to break the cycle of indebtedness and secure a trajectory of sustainable and inclusive economic growth.

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