Evaluating The Efficacy Of Fiscal Expenditure In Pakistan: The Influence Of Trade Openness And Public Debt Levels

Abstract

This study evaluates the effectiveness of fiscal spending in Pakistan, focusing on the roles of trade openness and public debt as key determinants of spending. The study aims to comprehend the impacts of trade openness and public debt on Pakistan's fiscal policy measures, considering the significant influence of macroeconomic policies on a country's economic and social development. Given the escalating state fiscal deficits contributing to Pakistan's mounting debt, it becomes crucial to explore whether enhancing trade can alleviate public debt issues and regulate government spending in the country. Utilizing annual data spanning from 1992 to 2021, this research employs the Autoregressive Distributed Lag (ARDL) model, incorporating unit root tests to assess fiscal policy spending in Pakistan. The findings reveal that trade openness is predominantly influenced by inflation, interest rates, and unemployment in Pakistan. Additionally, public debt is directly associated with lagged difference indicators. Conversely, fiscal expenditure tends to be correlated with public debt levels. However, no substantial evidence of a relationship between fiscal expenditure and trade openness is found. Consequently, the study suggests diversifying revenue sources, curbing population growth, and ensuring the judicious use of debt instruments by the government of Pakistan as potential measures to address these issues.