The Impact of Trade Openness and Public Debt Level on Fiscal Spending in Pakistan

Abstract

The study assesses the effectiveness of fiscal spending in Pakistan. Along with that, trade openness and public debt have been considered the main determinants of budgetary expenditure. The primary purpose of this study is to understand the influences of trade openness and public debt on the fiscal policy measures of Pakistan. Presently, Pakistan's debt is also aggrandizing due to the state budgetary deficits. In such circumstances, it is essential to understand whether trade enhancement can resolve the issues of public debt and regulate government spending in Pakistan or not? This research used annual data from 1990 to 2019 for statistical analysis to investigate this phenomenon. For empirical analysis, the ARDL model is used based on the unit root test to assess fiscal policy spending in Pakistan. The study's findings asserted that trade openness is primarily driven by inflation, interest rate, and Pakistan's unemployment. At the same time, public debt is directly associated with lagged difference indicators. Contrarily, fiscal expenditure tends to be related to public debt. However, the study did not find any evidence of a link between budgetary expenditure and trade openness. Thus, the study recommends diversification of revenue, reduction in population growth, and justified use of debt instruments by the government of Pakistan.