Team Details:

Theme/Relevant Ministry:

TAXATION/ FISCAL MANAGEMENT:
Federal Board of Revenue of Pakistan, Ministry of Finance

Project Brief:

Significant reforms occurred in 2010, when under the 18th Constitutional Amendment seventeen ministries/divisions were stipulated to be dissolved at the federal level and devolved to the provinces. Accordingly, the 7th NFC Award also transferred a sizeable share of revenues to the provinces. An evaluation of the effects of 18th Constitutional Amendment and 7th NFC Award on economic growth is crucial.  This entails investigating the impact of government spending, particularly by the provinces, on account of increased NFC induce fiscal flows, on economic growth. Hence, the estimation of government spending multipliers, which allows measuring the short-term impact of spending on economic growth and helps assessing the long-term success of these reforms and guiding future policy decisions. This study aims: to estimate the government spending multipliers of different functional categories of government spending for the federal and combined provincial governments on economic growth; to analyze the dynamic effects of these functional spending components on key macroeconomic variables, including output, private consumption, investment. The study will employ a two-stage model to estimate these multipliers using quarterly data from 2001-02Q1 to 2022-23Q4. This study is a pioneering effort in Pakistan, which provides a comprehensive picture of spending and illuminate the specific drivers of economic growth for the two tiers of government. The findings offer invaluable insights for evidence-based fiscal policy decisions.

Public Policy Relevance:

The estimated component-specific fiscal multipliers in this study offer valuable insights for tailoring fiscal policy toward sustainable and inclusive growth in Pakistan. The differentiated impacts of various spending categories highlight the need for strategic resource allocation. Prioritizing investment in productive categories like education and infrastructure, while cautiously managing non-productive expenditures, can significantly boost output. The findings also emphasize the importance of fiscal prudence. Highlighting the negative multipliers associated with some spending categories underscores the need for responsible debt management and efficient revenue generation. Additionally, the variations in multipliers across economic contexts emphasize the need for flexible and context-sensitive fiscal policy adjustments. Adapting spending strategies during times of exchange rate fluctuations, fiscal stress, or financial crises can mitigate potential negative impacts and maximize the positive effects of government spending.