Fiscal Implications for Rural-Urban Income Inequality: The Case of Pakistan

Purpose: This study investigates the fiscal implications through taxes and total expenditures for rural-urban income inequality in Pakistan. Fiscal policy plays a significant role in stabilizing the macroeconomics variables and equal distribution of income among society. Pakistan is a good case study because there is a dual rural-urban sector that emerges with industrial development and other traditional rural agriculture-based regions. Design/Methodology/Approach: We use time series data (1985-2018) with autoregressive distributed lag models (ARDL) for long-run and error correction models (ECM) for short span dynamic co-integration. The above models try to capture the practical effect of fiscal progress on income distribution among modern urban and traditional rural regions. Findings: The findings show that tax side fiscal measures are more harmful to rural-urban income distribution. On the expenditure side, fiscal policy has a significant impact on all disburse income distribution. The most surprising results belong to trade liberalization, it has significantly improved income distribution in urban areas but not in the rurals. Financial development has also verified the accumulation of wealth among rural-urban areas because of the emergence of private profiteering groups in Pakistan. Practical Implications: For policy purposes the government of Pakistan should spend on improving the quality of life of the households by investing in social goods like health, education, and foundation inequality situation may be better off. The nature of public spending and who gains the benefits from this spending decide the nature of inequality. On the supply side, the government should reduce the tax burden for rural households. Originality/Value: The results of the study may improve the rural income distribution if they used properly.