Commenced in January 2007
Frequency: Monthly
Edition: International
Paper Count: 31108
Impact of Revenue Gap on Budget Deficit, Debt Burden and Economic Growth: An Evidence from Pakistan

Authors: M. W. Siddiqi, M. Ilyas


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: Economic growth, Budget Deficit, debt burden, Revenue Gap

Digital Object Identifier (DOI):

Procedia APA BibTeX Chicago EndNote Harvard JSON MLA RIS XML ISO 690 PDF Downloads 2431


[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,
[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:
[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.