Budget balance through revenue or spending adjustment: Evidence from Pakistan

Abstract

In this study we analyze how government expenditures, taxes and debt respond to primary budget deficit in case of Pakistan during the period 1961 to 2007. Results from Johansen cointegration test support the existence of one cointegrating vector. Further to study the behaviour of intertemporal budget constraint, we use error correction model. The main result we obtain is that budget deficit is financed by taking loan and through monetization of debt; it is neither adjusted by increasing total revenues nor by decreasing total government expenditures. So a deficit does not generate long run stabilizing effect on total revenues and government expenditures and behaviour of these two is independent of each other.