Impact of government spending on environment: evidence from Pakistan

Abstract

Global warming has not only posed a major threat on the sustainability of economies but has also become a serious concern for policy makers and researchers in the recent past. The empirical research, by large, concludes economic growth as the main cause of environmental degradation followed by the fiscal spending due to increasing role of government expenditures in the economies. There is voluminous literature examining this relationship for a diverse sample of countries. However, there is no such empirical study conducted for the case of Pakistan yet. This study, therefore, will be a pioneer study to examine this relationship empirically for Pakistan. The objectives of the study are twofold. First, to empirically estimate the impact of sector wise spending on environmental degradation. Since fiscal spending also affects economic growth which further affects the environment therefore our second objective is to capture this indirect impact of fiscal spending on environmental degradation through economic growth. To fulfill our objectives, we use carbon emissions as a proxy for environmental degradation and government expenditure on different sectors to measure fiscal spending. We employ a time series data ranging from 1960-2015. At the first step of empirical investigation, we test the time series properties of the data. Finally, we employ the appropriate time series econometric technique namely Engle Granger Coinntegration to estimate the impact of government spending on environmental degradation. Our findings confirm the existence of Environmental Kuznet Curve in case of Pakistan as economic growth appears to increase the carbon emissions at first and then reduces it after reaching a certain level of income. Fiscal spending on majority of the sectors, on the other hand, has positive impact on carbon emissions in case of Pakistan. These finding are consistent with the existing studies and suggest that in Pakistan government expenditures are not environment friendly.