PROBLEM STATEMENT

Fiscal policy is the use of government revenue collection (mainly taxes) and expenditure (spending) to
influence a country's economy. Fiscal policy is based on the theories of the British economist John
Maynard Keynes, whose Keynesian economics indicated that government changes in the levels of
taxation and government spending influences aggregate demand and the level of economic activity.
Governments use fiscal policy to influence the level of aggregate demand in the economy, so that certain
economic goals can be achieved.
The Keynesian view of economics suggests that increasing government spending and decreasing the rate
of taxes are the best ways to have an influence an aggregate demand, stimulate it, while decreasing
spending and increasing taxes after the economic expansion has already taken place. Additionally,
Keynesians argue that expansionary fiscal policy should be used in times of recession or low economic
activity as an essential tool for building the framework for strong economic growth and working towards
full employment.
But economists still debate the effectiveness of fiscal stimulus. The argument mostly centers on crowding
out: whether government borrowing leads to higher interest rates that may offset the simulative impact of
spending.
A large number of studies have been carried out to examine the impact of fiscal policy variables on
economic growth, investment, consumption, inflation, exchange rate, external deficit and other
macroeconomic activities [Landau (1986); Höoppner (2003); Perotti (2005), Amanja and Morrissey
(2005); Falk, et al. (2006); Rezk (2006); Castro, et al. (2006); Fatas and Mihov (1998); Sinha (1998);
William and Orszag (2003); Claus, et al. (2006) and Kukk (2006)]. Government spending, tax revenues
and budget deficits as fiscal policy variables have been used by these authors and found different
responses of macroeconomic activities to fiscal innovations. According to Höoppner (2003), Claus, et al.
(2006), Esau (2006), Heppke-Falk, et al. (2006) and Castro, et al. (2006), shocks to government spending
positively affect GDP growth rate, whereas shocks to taxes inversely affect GDP growth rate.
Furthermore, GDP growth rate responds negatively to budget deficit in the long run [Balassa (1988);
Iqbal and Zahid (1998); Iqbal and Zahid (1998). The rising budget deficit has been considered as one of
the main constraints to economic growth [Iqbal and Zahid (1998); Fischer (1993); Easterly and Rebelo
(1992); Levine and Zervos (1993); Barro (1991); Mwebaze (2002) and Balassa (1988)]. From the relevant
literature it is clear that fiscal policy affects economic growth.
This research is carried out to understand the deep relation between the fiscal policy variables and the
economic growth of Pakistan. The research is based on the evaluative study of the past 10 years and to
determine how fiscal policies of the different governments have been effected the economic growth of the
country.

https://www.jstor.org/stable/41428671?seq=2#metadata_info_tab_contents