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Tax-Spend or Spend-Tax Hypotheses: A Case Study of Pakistan using Threshold Cointegration with Asymmetric Adjustment

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  • Ayesha Naz

    (International Islamic University, Islamabad)

  • Muhammad Zamir

    (Virtual University of Pakistan)

Abstract

Revenue-spending nexus has significant inferences for the political economy to understand the fiscal policies particularly in context of Pakistan economy. In the current study, the traditional tax-spend versus spend-tax view of fiscal policy is investigated based on asymmetrical TAR and M-TAR tests of cointegration. For this, we have used annual data on taxes and government spending for Pakistan over the period 1976 to 2019. The results show some evidence in favor of the traditional tax-spend view. It implies that catering revenue from tax side results in more spending and increases the fiscal deficit. Hence, the devastating effect on fiscal balance is evident, if it is targeted through taxes. Therefore, it is required that fiscal adjustment should be from spending side rather than tax. Furthermore, the results indicate that both taxes and government spending are cointegrated (have long-run equilibrium relationship) with asymmetric adjustment process towards long-run equilibrium. Moreover, budgetary deviations below long-run equilibrium are corrected faster than deviations above it.

Suggested Citation

  • Ayesha Naz & Muhammad Zamir, 2024. "Tax-Spend or Spend-Tax Hypotheses: A Case Study of Pakistan using Threshold Cointegration with Asymmetric Adjustment," Journal of Economic Sciences, Federal Urdu University Islamabad, Department of Economics, vol. 3(1), pages 13-24, June.
    • Handle: RePEc:azm:journl:v:3:y:2024:i:1:p:13-24
    DOI: 10.55603/jes.v3i1.a2
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    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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