Fiscal Adjustment: Trade-offs of Macro-economic Goals and Recent Policy Reforms in Pakistan

Fiscal policy, being an embodiment of government measures to raise resources through taxes, tariffs of utilities, user charges and pricing of public sector goods, diverts resources from private sector to the government which rechannels these resource into socially preferred activities. The resource diversion and their rechannelisation helps achieve certain economic goals, and for this reason, the fiscal policy has strong interactive linkages with other macro economic policies. By virtue of this strong bond, the fiscal indicators have a close interactive association with other macro economic indicators. For this reason, the role of fiscal policy is inevitably vulnerable to influences of other economic policies and fiscal discipline and general economic health of the country become interlinked. This linkage results in generating trade offs between different macroeconomic policy goals. The aim of this paper is to demonstrate how interaction of macro economic policies in Pakistan has moved over the years in past and to assess the ultimate impact on fiscal adjustment of economic policies initiated under the structural adjustment and stabilisation (SAAS) reforms. This presentation centres around the basic hypothesis that the fiscal stability chiefly depends on interaction between public finances and other macro indicators of the economy which are differently influenced by different policies. The objective is to demonstrate how conflicting goals made the task of the policy mix under SAAS reforms difficult in reducing the fiscal gap.