Impact of Revenue Gap on Budget Deficit, Debt Burden and Economic Growth: An Evidence from Pakistan
Availability and mobilization of revenue is the main
essential with which an economy is managed and run. While
planning or while making the budgets nations set revenue targets to
be achieved. But later when the accounts are closed the actual
collections of revenue through taxes or even the non-tax revenue
collection would invariably be different as compared to the initial
estimates and targets set to be achieved. This revenue-gap distorts the
whole system and the economy disturbing all the major macroeconomic
indicators. This study is aimed to find out short and long
term impact of revenue gap on budget deficit, debt burden and
economic growth on the economy of Pakistan. For this purpose the
study uses autoregressive distributed lag approach to cointegration
and error correction mechanism on three different models for the
period 1980 to 2009. The empirical results show that revenue gap has
a short and long run relationship with economic growth and budget
deficit. However, revenue gap has no impact on debt burden.
[1] Marsden, K. (1983). Links between taxes and economic growth. World
Bank Staff Working Paper Number 605, The World Bank, Washington,
D.C.
[2] Kim, S.J (1997). Growth effect of taxes in an endogenous growth model:
to what extent do taxes affect economic growth? Journal of Economic
Dynamics and Control, vol. 23, pp. 125-158.
[3] Solow, R. (1956). A Contribution to the Theory of Economic Growth.
Quarterly Journal of Economics, vol. 70, pp. 65-94.
[4] Lucas, R.E. 1990. Supply-side economics: an analytical review. Oxford
Economic Papers, vol. 42, pp. 293-316.
[5] Jones, L.E., Manuelli, R.E. (1990). A convex model of equilibrium
growth. Journal of Political Economy, Vol. 98. 1008-1038.
[6] Rebelo, S.T. (1991). Long run policy analysis and long run growth.
Journal of Political Economy, vol. 99, pp. 500-521.
[7] King, R.G., Rebelo, S.T. (1990). Public policy and economic growth:
developing neoclassical implications. Journal of Political Economy, vol.
98. pp. 126-149.
[8] Yuen, C. (1991). Taxation, human capital accumulation, and economic
growth. Ph.D. dissertation, University of Chicago, Chicago.
[9] Mankiw, N. G.; Romer, D. and Weil, D. N. (1992). A Contribution to the
Empirics of Economic Growth, The Quarterly Journal of Economics,
vol. 107 (2), pp. 407-437.
[10] Schneider, F. and B. Frey (2001). Informal and underground economy,
Economics in Ashenfelter, Orley. International Encyclopedia of Social
and Behavioral Science, vol. 12, Elsevier Science Publishing Company,
Amsterdam.
[11] Chelliah R.J. (1971). Trends in Taxation in Developing Countries. IMF
Staff Papers, Vol. 18(2), pp. 254-325.
[12] Pyle, D. J. (1989). Tax Evasion and the Black Economy. The Macmillan
Press Ltd.
[13] Barro, R.J. (1979). On the Determination of Public Debt. Journal of
Political Economics. Vol. 87, pp. 940-971.
[14] Barro, R.J. (1990). Government spending in a simple model of
endogenous growth. Journal of Political Economics. 98, 103-125.
[15] Bender, B. (1984). An Analysis of the Laffer curve. Economic Inquiry,
Vol. 22, pp. 141-419.
[16] Baffes, J. and A. Shah (1994). Causality and Comovement Between
Taxes and Expenditures: Historical Evidence from Argentina, Brazil,
and Mexico. Journal of Development Economics, Vol. 44. 311-331.
[17] Martinez, J. V., (2006). Pakistan: A Preliminary Assessment of the
Federal Tax System. International Studies Program Working Paper
Series, Andrew Young School of Policy Studies, Georgia State
University, USA.
[18] Anwar, T. (2002). Unsustainable Debt Burden and Poverty in Pakistan.
Discussion Paper No. 2002/53, United Nations University.
[19] Yasmin, B. and H. Rauf (2003). Measuring the underground economy
and its impact on the economy of Pakistan. The Lahore Journal of
Economics, Vol. 9(2), pp. 93-103.
[20] Asian Development Bank (2007). Avenue, Mandaluyong City 1550,
Philippines, www.adb.org.
[21] Hanif, M. N. (2002). Public Debt Management. The Journal, National
Institution of Public Administration, Karachi, Pakistan, Vol. 7(4), pp.
41-72.
[22] Siddiqui, R. and A. Malik (2002). Debt and Economic Growth in South
Asia. The Pakistan Development Review, vol. 40 (4), pp. 677-688.
[23] Yitzhaki, S. (1974). Income Tax Evasion: A Theoretical Analysis,
Journal of Public Economics, vol. (3), pp. 201-220.
[24] Mitchell, C. N. (1988). Taxation, Retribution, and Justice. The
University of Toronto Law Journal, vol. 38(2), pp. 151-183.
[25] Wang, P. and C. K. Yip (1992). Taxation and Economic Growth: The
Case of Taiwan. American Journal of Economics and Sociology, vol.
51(3), pp. 317-331.
[26] Grossman, M. (1993). Policy Watch: Alcohol and cigarette Taxes, The
Journal of Economic Perspectives, vol. 7(4), pp. 211-222.
[27] Burgess, R. and Stern, N. (1993). Taxation and Development. Journal
of Economic Literature, vol. 31 (2), pp. 762-830.
[28] Robinson, S., A. Y├║nez-Naude, R. Hinojosa-Ojeda, J.D. Lewis and S.
Devarajan (1999). From Stylized to Applied Models: Building Multi
sector CGE Models for Policy Analysis. North American Journal of
Economics and Finance, vol. 10, pp 5-38.
[29] Winters, L. A. (2000). Trade Liberalization and Poverty. University of
Sussex in its series PRUS Working Papers with number 07, Brighton,
United Kingdom.
[30] Ebrill L., J. Strotsky and R. Gropp (2000). Revenue Implications of
Trade Liberalization. International Monetary Fund Occasional Paper
Number 180.
[31] Razeen, S. (2000). Developing Country Trade Policy Reform and the
WTO, Cato Journal, vol. 19, pp. 403-423.
[32] Kemal, A.R. (2001). Debt Accumulation and its implications for Growth
and Poverty. The Pakistan Development Review 40:4 Part I. 263-281.
[33] Chaudhary M. Aslam and S. Anwar (2001). Debt Laffer Curve for
South Asian Countries. The Pakistan Development Review, Vol. 40(4)
Part II. 705-720.
[34] Maingot, A. P. and D. Mitchell (2002). Taxing Free Riders. Foreign
Policy, No.132. 6-8.
[35] Beckmann. K. (2003). Tax Progression and Evasion: a Simple Graphical
Approach. Andrássy Working Paper Series No. III, Universidad
Budapest, Hungary.
[36] Kemal, M. A. (2003). Underground Economy and Tax Evasion in
Pakistan: A Critical Evaluation. Research Report No.184. Pakistan
Institute of Development Economics. Islamabad.
[37] Slaughter, J.M. (2003). Tariff Elimination for Industrial Goods: Why
the Gains Will Far Outweigh Any Losses. Background Paper, The
National Foreign Trade Council, Washington, DC, USA.
[38] Baunsgaard, T. and Keen, M. (2004). Tax Revenue and (or) Trade
Liberalization. Discussion Paper, Fiscal Affairs Department,
International Monetary Fund, Washington D.C., USA.
[39] Sandmo, A. (2004). The theory of tax evasion: A retrospective view.
Discussion paper 31/04, Norwegian School of Economics and Business
Administration, Norway.
[40] Nguyen, T. H. (2006). Tax corruption, public debt and the policy
interaction in emerging economies. Vietnam Development Forum
(VDF), Tokyo, Japan.
[41] Dickey, D.A. and W.A. Fuller (1979), "Distribution of the Estimators for
Autoregressive Time Series with a Unit Root," Journal of the American
Statistical Association, 74, p. 427-431.
[42] Charles R. Nelson and Charles R. Plosser (1982). Trends and random
walks in macroeconomic time series: Some evidence and implications.
Journal of Monetary Economics, Vol. 10(2). 139-162.
[43] Perron, P. (1989). The Great Crash, the Oil Price Shock, and the Unit
Root Hypothesis. Econometrica, Vol. 57(6). 1361-1401.
[44] Maddala, G. S. and In-Moo Kim (2003). Unit Roots, Cointegration, and
Structural Change. Cambridge, Cambridge University Press.
[45] Enders, W. (2004). Applied Econometric Time Series, Second Edition.
John Wiley & Sons: United States.
[46] Hall, A., (1994). Testing for a Unit Root in Time Series with Pretest
Data-Based Model Selection, Journal of Business and Economic
Statistics, vol. 12, pp. 461-70.
[47] Ng, S. and P. Perron (1995). Unit Root Test in ARMA Models with Data
Dependent Methods for the Selection of the Truncation Lag, Journal of
the American Statistical Association 90: 268-281.
[48] Ng. S. and P. Perron (2001). Lag Length Selection and the Construction
of Unit Root Tests with Good Size and Power, Econometrica, Vol. (69),
pp. 1519-1554.
[49] Harris, R. and R. Sollis (2003). Applied time series modelling and
forecasting. John Wiley and Sons, Chichester.
[50] Engle, R.F. and C.W.J. Granger (1987). Cointegration and Error
Correction: Representation, Estimation and Testing. Econometrica, Vol.
55. 251-276.
[51] Johansen, S. (1991). Estimation and Hypothesis Testing of Cointegration
Vectors in Gaussian Vector Autoregressive Models. Econometrica, vol.
59(6), pp. 1551-1580.
[52] Johansen, S. and K. Juselius (1990). Maximum Likelihood Estimation
and Inference on Cointegration with Application for the Demand for
Money, Oxford Bulletin of Economics and Statistics, vol. 52, pp. 169-
210
[53] Charemza, W. and D. F. Deadman (1992). New Directions in
Econometrics Practice: General to Specific Modeling, Cointegration and
Vector Autoregression. Aldershot, Edward Elgar.
[54] Pesaran, M. H. and B. Pesaran (1997). Working with Microfit 4.0:
Interactive Econometric Analysis. Oxford, Oxford University Press.
[55] Pesaran, M. H., Y. Shin, and R. J. Smith (2001). Bounds Testing
Approaches to the Analysis of Long-Run Relationship. Journal of
Applied Econometrics, Vol. 16. 289-326.
[56] Pesaran, M.H. and Y. Shin (1999). An Autoregressive Distributed Lag
Modelling Approach to Cointegration Analysis, Chapter 11 in S. Strom,
A. Holly and Diamond (Eds.), Econometrics and Economic Theory in
20th Century: The Ragnar Frisch Centennial Symposium, Cambridge
University Press. Available at:
www.econ.cam.ac.uk/faculty/pesaran/ADL.pdf.
[57] Laurenceson, J. and Joseph C.H. Chai (2003). Financial Reform and
Economic Development in China. Chelteham, UK, Edward Elgar.
[58] Banerjee, A., J. J. Dolado, J. W. Galbraith and D. F. Hendry (1993).
Cointegration, Error Correction, and the Econometric Analysis of Nonstationary
Data. Oxford, Oxford University Press.
[59] Romero-Ávila, D. Y. and Strauch, R. (2008). Public Finances and Longterm
Growth in Europe-Evidence from a Panel Data Analysis, European
Journal of Political Economy, vol. 24, pp. 172-191.
[60] florio, M., and S. Colautti (2005). A logistic growth theory of public
expenditures: A study of five countries over 100 years, Public Choice.
122: 355-393.
[61] Narayan,P.K. and R.Smith (2004). "Examining the relationship between
trade balance and exchange rate: the case of China's trade with the
USA" Applied Economics Letters, vol. 13(8), pp. 507-510.
[1] Marsden, K. (1983). Links between taxes and economic growth. World
Bank Staff Working Paper Number 605, The World Bank, Washington,
D.C.
[2] Kim, S.J (1997). Growth effect of taxes in an endogenous growth model:
to what extent do taxes affect economic growth? Journal of Economic
Dynamics and Control, vol. 23, pp. 125-158.
[3] Solow, R. (1956). A Contribution to the Theory of Economic Growth.
Quarterly Journal of Economics, vol. 70, pp. 65-94.
[4] Lucas, R.E. 1990. Supply-side economics: an analytical review. Oxford
Economic Papers, vol. 42, pp. 293-316.
[5] Jones, L.E., Manuelli, R.E. (1990). A convex model of equilibrium
growth. Journal of Political Economy, Vol. 98. 1008-1038.
[6] Rebelo, S.T. (1991). Long run policy analysis and long run growth.
Journal of Political Economy, vol. 99, pp. 500-521.
[7] King, R.G., Rebelo, S.T. (1990). Public policy and economic growth:
developing neoclassical implications. Journal of Political Economy, vol.
98. pp. 126-149.
[8] Yuen, C. (1991). Taxation, human capital accumulation, and economic
growth. Ph.D. dissertation, University of Chicago, Chicago.
[9] Mankiw, N. G.; Romer, D. and Weil, D. N. (1992). A Contribution to the
Empirics of Economic Growth, The Quarterly Journal of Economics,
vol. 107 (2), pp. 407-437.
[10] Schneider, F. and B. Frey (2001). Informal and underground economy,
Economics in Ashenfelter, Orley. International Encyclopedia of Social
and Behavioral Science, vol. 12, Elsevier Science Publishing Company,
Amsterdam.
[11] Chelliah R.J. (1971). Trends in Taxation in Developing Countries. IMF
Staff Papers, Vol. 18(2), pp. 254-325.
[12] Pyle, D. J. (1989). Tax Evasion and the Black Economy. The Macmillan
Press Ltd.
[13] Barro, R.J. (1979). On the Determination of Public Debt. Journal of
Political Economics. Vol. 87, pp. 940-971.
[14] Barro, R.J. (1990). Government spending in a simple model of
endogenous growth. Journal of Political Economics. 98, 103-125.
[15] Bender, B. (1984). An Analysis of the Laffer curve. Economic Inquiry,
Vol. 22, pp. 141-419.
[16] Baffes, J. and A. Shah (1994). Causality and Comovement Between
Taxes and Expenditures: Historical Evidence from Argentina, Brazil,
and Mexico. Journal of Development Economics, Vol. 44. 311-331.
[17] Martinez, J. V., (2006). Pakistan: A Preliminary Assessment of the
Federal Tax System. International Studies Program Working Paper
Series, Andrew Young School of Policy Studies, Georgia State
University, USA.
[18] Anwar, T. (2002). Unsustainable Debt Burden and Poverty in Pakistan.
Discussion Paper No. 2002/53, United Nations University.
[19] Yasmin, B. and H. Rauf (2003). Measuring the underground economy
and its impact on the economy of Pakistan. The Lahore Journal of
Economics, Vol. 9(2), pp. 93-103.
[20] Asian Development Bank (2007). Avenue, Mandaluyong City 1550,
Philippines, www.adb.org.
[21] Hanif, M. N. (2002). Public Debt Management. The Journal, National
Institution of Public Administration, Karachi, Pakistan, Vol. 7(4), pp.
41-72.
[22] Siddiqui, R. and A. Malik (2002). Debt and Economic Growth in South
Asia. The Pakistan Development Review, vol. 40 (4), pp. 677-688.
[23] Yitzhaki, S. (1974). Income Tax Evasion: A Theoretical Analysis,
Journal of Public Economics, vol. (3), pp. 201-220.
[24] Mitchell, C. N. (1988). Taxation, Retribution, and Justice. The
University of Toronto Law Journal, vol. 38(2), pp. 151-183.
[25] Wang, P. and C. K. Yip (1992). Taxation and Economic Growth: The
Case of Taiwan. American Journal of Economics and Sociology, vol.
51(3), pp. 317-331.
[26] Grossman, M. (1993). Policy Watch: Alcohol and cigarette Taxes, The
Journal of Economic Perspectives, vol. 7(4), pp. 211-222.
[27] Burgess, R. and Stern, N. (1993). Taxation and Development. Journal
of Economic Literature, vol. 31 (2), pp. 762-830.
[28] Robinson, S., A. Y├║nez-Naude, R. Hinojosa-Ojeda, J.D. Lewis and S.
Devarajan (1999). From Stylized to Applied Models: Building Multi
sector CGE Models for Policy Analysis. North American Journal of
Economics and Finance, vol. 10, pp 5-38.
[29] Winters, L. A. (2000). Trade Liberalization and Poverty. University of
Sussex in its series PRUS Working Papers with number 07, Brighton,
United Kingdom.
[30] Ebrill L., J. Strotsky and R. Gropp (2000). Revenue Implications of
Trade Liberalization. International Monetary Fund Occasional Paper
Number 180.
[31] Razeen, S. (2000). Developing Country Trade Policy Reform and the
WTO, Cato Journal, vol. 19, pp. 403-423.
[32] Kemal, A.R. (2001). Debt Accumulation and its implications for Growth
and Poverty. The Pakistan Development Review 40:4 Part I. 263-281.
[33] Chaudhary M. Aslam and S. Anwar (2001). Debt Laffer Curve for
South Asian Countries. The Pakistan Development Review, Vol. 40(4)
Part II. 705-720.
[34] Maingot, A. P. and D. Mitchell (2002). Taxing Free Riders. Foreign
Policy, No.132. 6-8.
[35] Beckmann. K. (2003). Tax Progression and Evasion: a Simple Graphical
Approach. Andrássy Working Paper Series No. III, Universidad
Budapest, Hungary.
[36] Kemal, M. A. (2003). Underground Economy and Tax Evasion in
Pakistan: A Critical Evaluation. Research Report No.184. Pakistan
Institute of Development Economics. Islamabad.
[37] Slaughter, J.M. (2003). Tariff Elimination for Industrial Goods: Why
the Gains Will Far Outweigh Any Losses. Background Paper, The
National Foreign Trade Council, Washington, DC, USA.
[38] Baunsgaard, T. and Keen, M. (2004). Tax Revenue and (or) Trade
Liberalization. Discussion Paper, Fiscal Affairs Department,
International Monetary Fund, Washington D.C., USA.
[39] Sandmo, A. (2004). The theory of tax evasion: A retrospective view.
Discussion paper 31/04, Norwegian School of Economics and Business
Administration, Norway.
[40] Nguyen, T. H. (2006). Tax corruption, public debt and the policy
interaction in emerging economies. Vietnam Development Forum
(VDF), Tokyo, Japan.
[41] Dickey, D.A. and W.A. Fuller (1979), "Distribution of the Estimators for
Autoregressive Time Series with a Unit Root," Journal of the American
Statistical Association, 74, p. 427-431.
[42] Charles R. Nelson and Charles R. Plosser (1982). Trends and random
walks in macroeconomic time series: Some evidence and implications.
Journal of Monetary Economics, Vol. 10(2). 139-162.
[43] Perron, P. (1989). The Great Crash, the Oil Price Shock, and the Unit
Root Hypothesis. Econometrica, Vol. 57(6). 1361-1401.
[44] Maddala, G. S. and In-Moo Kim (2003). Unit Roots, Cointegration, and
Structural Change. Cambridge, Cambridge University Press.
[45] Enders, W. (2004). Applied Econometric Time Series, Second Edition.
John Wiley & Sons: United States.
[46] Hall, A., (1994). Testing for a Unit Root in Time Series with Pretest
Data-Based Model Selection, Journal of Business and Economic
Statistics, vol. 12, pp. 461-70.
[47] Ng, S. and P. Perron (1995). Unit Root Test in ARMA Models with Data
Dependent Methods for the Selection of the Truncation Lag, Journal of
the American Statistical Association 90: 268-281.
[48] Ng. S. and P. Perron (2001). Lag Length Selection and the Construction
of Unit Root Tests with Good Size and Power, Econometrica, Vol. (69),
pp. 1519-1554.
[49] Harris, R. and R. Sollis (2003). Applied time series modelling and
forecasting. John Wiley and Sons, Chichester.
[50] Engle, R.F. and C.W.J. Granger (1987). Cointegration and Error
Correction: Representation, Estimation and Testing. Econometrica, Vol.
55. 251-276.
[51] Johansen, S. (1991). Estimation and Hypothesis Testing of Cointegration
Vectors in Gaussian Vector Autoregressive Models. Econometrica, vol.
59(6), pp. 1551-1580.
[52] Johansen, S. and K. Juselius (1990). Maximum Likelihood Estimation
and Inference on Cointegration with Application for the Demand for
Money, Oxford Bulletin of Economics and Statistics, vol. 52, pp. 169-
210
[53] Charemza, W. and D. F. Deadman (1992). New Directions in
Econometrics Practice: General to Specific Modeling, Cointegration and
Vector Autoregression. Aldershot, Edward Elgar.
[54] Pesaran, M. H. and B. Pesaran (1997). Working with Microfit 4.0:
Interactive Econometric Analysis. Oxford, Oxford University Press.
[55] Pesaran, M. H., Y. Shin, and R. J. Smith (2001). Bounds Testing
Approaches to the Analysis of Long-Run Relationship. Journal of
Applied Econometrics, Vol. 16. 289-326.
[56] Pesaran, M.H. and Y. Shin (1999). An Autoregressive Distributed Lag
Modelling Approach to Cointegration Analysis, Chapter 11 in S. Strom,
A. Holly and Diamond (Eds.), Econometrics and Economic Theory in
20th Century: The Ragnar Frisch Centennial Symposium, Cambridge
University Press. Available at:
www.econ.cam.ac.uk/faculty/pesaran/ADL.pdf.
[57] Laurenceson, J. and Joseph C.H. Chai (2003). Financial Reform and
Economic Development in China. Chelteham, UK, Edward Elgar.
[58] Banerjee, A., J. J. Dolado, J. W. Galbraith and D. F. Hendry (1993).
Cointegration, Error Correction, and the Econometric Analysis of Nonstationary
Data. Oxford, Oxford University Press.
[59] Romero-Ávila, D. Y. and Strauch, R. (2008). Public Finances and Longterm
Growth in Europe-Evidence from a Panel Data Analysis, European
Journal of Political Economy, vol. 24, pp. 172-191.
[60] florio, M., and S. Colautti (2005). A logistic growth theory of public
expenditures: A study of five countries over 100 years, Public Choice.
122: 355-393.
[61] Narayan,P.K. and R.Smith (2004). "Examining the relationship between
trade balance and exchange rate: the case of China's trade with the
USA" Applied Economics Letters, vol. 13(8), pp. 507-510.
@article{"International Journal of Business, Human and Social Sciences:54330", author = "M. W. Siddiqi and M. Ilyas", title = "Impact of Revenue Gap on Budget Deficit, Debt Burden and Economic Growth: An Evidence from Pakistan", abstract = "Availability and mobilization of revenue is the main
essential with which an economy is managed and run. While
planning or while making the budgets nations set revenue targets to
be achieved. But later when the accounts are closed the actual
collections of revenue through taxes or even the non-tax revenue
collection would invariably be different as compared to the initial
estimates and targets set to be achieved. This revenue-gap distorts the
whole system and the economy disturbing all the major macroeconomic
indicators. This study is aimed to find out short and long
term impact of revenue gap on budget deficit, debt burden and
economic growth on the economy of Pakistan. For this purpose the
study uses autoregressive distributed lag approach to cointegration
and error correction mechanism on three different models for the
period 1980 to 2009. The empirical results show that revenue gap has
a short and long run relationship with economic growth and budget
deficit. However, revenue gap has no impact on debt burden.", keywords = "Revenue Gap, Economic Growth, Budget Deficit,Debt Burden", volume = "5", number = "2", pages = "142-10", }
