Budget Deficits in Pakistan: A Time Series Analysis of The Impact of Economic Political and Institutional Factors

Abstract

This article aims to provide a thorough empirical examination of the budget deficit of Pakistan, spanning a period of four decades from 1976 to 2023. In order to fulfill the objective of the study, a wide range of economic, political, and institutional variables have been extensively examined. The ARDL technique to cointegration has been employed due to the time series structure of the variables. The objective of this article is to examine the long-term correlation between the budget deficit and its several drivers, such as inflation, debt services, economic expansion, and government size. The study's findings offer important insight into the dynamic connections between the budget deficit and its different determining factors. In Pakistan, inflation has become a major and harmful factor contributing to the budget deficit. The data demonstrates that a continuous increase in prices has resulted in a higher budget deficit. Furthermore, empirical evidence indicates that a significant portion of the deficit that exists is attributed to debt servicing charges. This highlights the importance of implementing effective regulations to control debt. Economic development exerts a positive and major impact on the management of budget deficit. In the case of Pakistan, a higher growth rate is correlated with a lower budget deficit. Moreover, this size of government has an adverse impact on the budget deficit. This demonstrates the necessity for the effective management of public finances. Corruption has an insignificant impact on the increase of the budget deficit in Pakistan. Moreover, the relationship between the political variables and budget deficit is not significant. The study fails to identify the relationship between the elections and democratic processes. This finding is unanticipated and the cause of rejection of one of the main hypothesis of the study. This may be attributed to the fact that the concerns of the political factors may be comparatively minor as compared to the economic ones. Keeping in view the findings of the current study and the previously mentioned variables, therefore this study provides an important insight into the dynamic relationship between the budget deficit and others economic, institutional and political factors. The findings of this study has generated fresh avenues for the future research, especially for the examinations of the impact of political factors because, this hypothesis has been rejected in our study.