Exploring Cyclical Behavior of Functional Heads of Public Expenditure in Pakistan

Abstract

Fiscal policy is usually designed to stabilize business cycle fluctuations with its countercyclical properties. Policy makers adopt expansionary fiscal policies in recessions and contractionary fiscal policies in booms. However, it is argued that developing countries are unable to practice countercyclical fiscal policies. Thus, this study examines the cyclical behaviour of the fiscal policy of Pakistan in terms of the functional heads of government expenditure at the federal level in Pakistan. The time period covered by the study is from 1984-2019 and the analysis covers function wise current, development, and total expenditure. The study employs the novel non-parametric econometric technique, Multivariate Adaptive Regression Splines (MARS) in order to reveal the cyclical patterns of functional heads of federal public current and development expenditures. The results of the study show that current expenditure on either of the function does not respond to the business cycles. Total expenditure on General Public Service (GPS) shows procyclical behaviour while that on defense shows counter-cyclical behaviour. Development expenditure on education is counter-cyclical in nature, while development expenditure on economic affairs shows mixed cyclical behaviour. Finally, development expenditure on social protection shows procyclical behaviour. From policy perspective this study holds a lot of importance since it will help the policy makers to reconsider the expenditures being incurred in various sectors of the economy during booms and busts.