Fiscal Policy and Economic Growth Empirical Evidence

Abstract

role that public policy plays in growth cannot be underestimated especially in developing countries which are faced with the constraints of lower revenues and higher population. With time, fiscal policy studies have taken an advanced shape which involves a complete disaggregation of the instruments of fiscal policy into categories of expenditure and taxes. The present study uses the theoretical foundation set by Barro and Sala-l-Martin to test the impact of fiscal policy on growth for four South Asian economies including Pakistan, India, Bangladesh and Sri Lanka. In doing so the total expenditure is divided into productive and non-productive and revenue into distortionary and non-distortionary categories. On Panel data set, cointegration tests and FMOLS estimation techniques are employed for long run estimates. The study finds that taxes and non-productive expenditures are growth-averse. On the other hand, productive expenditures on health, education, transportation, and communication have a significant positive impact on per capita GDP growth. Thus, the study recommends reorganization and restructuring of fiscal policy instruments to have growth promoting impact. In particular, since the present structure of taxes and expenditures has been found to be non-conducive for economic growth, there is a need for a careful review of the taxation and expenditure management policies of these economies.