Remittances, Democracy and Government Spending in Pakistan

Pakistan is one of the highest recipients of remittances in South Asia. However, the relationship between remittances and public finance has been unclear. This paper empirically examines the effects of remittances on government consumption spending, controlling for real GDP per capita, trade openness and democracy in Pakistan. Employing an autoregressive distributed lag (ARDL) modelling approach, we find evidence of a stable cointegrating relationship between government consumption spending, remittances, real GDP per capita, democracy and trade openness over the period 1976–2019. The long‐run findings reveal that remittances, real GDP per capita and democracy positively impact government consumption spending, whereas trade openness negatively affects government consumption spending. Causality analysis not only reveals evidence of unidirectional causality from real GDP per capita and remittances to government consumption spending but also feedback causality between democracy and government consumption spending. We further investigate the transmission channels and find that remittances positively affect government consumption spending via the tax revenue channel.