LOCATING THE BUDGET DEFICIT IN CONTEXT: The Case of Pakistan

The budget deficit, presently around 8 per cent of the GDP, is unequivocally believed to be the most serious economic problem facing Pakistan's economy. It is held responsible for causing inflation, lowering growth, crowding out private investment, and for resulting in a huge current account deficit. Consequently, the IMF, World Bank and government officials, without exception agree, that the budget deficit should be 'eliminated". This paper presents arguments which contest these claims and shows how the budget deficit has not caused all, or in fact any, of the problems attributed to it. In fact, a counter argument is presented in support of the positive and contributory role played by public expenditure. Furthermore, the political and institutional theory literature which explains the persistence of budget deficits due to extra-economic factors is examined and, subsequently, related to Pakistan. The central theme of this paper is that a historical institution-free abstractions regarding the budget deficit (or for that matter any economic or political concept) are redundant: the specific context of fiscal policy and budgetary deficits is all important.