The impact of fiscal deficit on economic growth: empirical evidence from Pakistan and Afghanistan

Abstract

The economic crises of Pakistan and Afghanistan are linked to the high fiscal deficit in the past, which has affected economic growth. The research aims to investigate the effect of fiscal deficit on economic growth with the data from 1973 to 2022 in Pakistan and 2002 to 2022 in Afghanistan and the ARDL procedure to estimate the model. The study investigates whether the fiscal deficit improves economic growth and how much the deficit can be minimised to maintain economic stability in Pakistan and Afghanistan. This study found that, over a long period, the fiscal deficit adversely impacts GDP growth in Pakistan. Similarly, the national debt has an adverse effect on GDP growth in Afghanistan. Moreover, in the near run, the fiscal deficit has a negative effect on GDP growth in Pakistan. Similarly, the national debt has a negative effect on GDP growth in Afghanistan. Therefore, this study concluded that the fiscal deficit harms GDP growth and does not support the Keynesian theory regarding the deficit in Pakistan and Afghanistan. Thus, this study endorsed that the government should increase the revenue to cover expenditures to eradicate or lessen the fiscal deficit and debt.