Fiscal Decentralization and Budget Deficit Evidence from Pakistan

Abstract

Fiscal Decentralization is defined as the devolution of powers and responsibilities of raising revenues and making expenditures to lower levels of government. Theoreticians argue that there are potential benefits associated with a decentralized government. Under political economy regime, a strong democratic set up leads to an efficient decentralized system which increases the efficiency and accountability of system. In turn the confidence of general public is built and they pay their due taxes thereby increasing revenues and reducing budget deficits. The present study has attempted to empirically verify the linkage between fiscal decentralization and its impact on budget deficit in Pakistan by using time series data from 1979-80 to 2014-15. The study has found a significant level of expenditure decentralization and its effect on deficit has been negative. On the other hand, the study finds that limited progress has been made on revenue decentralization, and as result it has failed to reduce budget deficit in Pakistan.