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Spend Now, Pay Later? Tax Smoothing and Fiscal Sustainability in South Asia

International Monetary Fund
Authors registered in the RePEc Author Service: Nadeem Haque (), Nilss Olekalns () and Paul Cashin ()

No 99/63, IMF Working Papers from International Monetary Fund

Abstract: This paper tests a version of Barro’s tax-smoothing model, which assumes intertemporal optimization by a government seeking to minimize the distortionary costs of taxation, using Pakistan and Sri Lankan data for 1956-95 and 1964-97, respectively. The empirical results indicate that Pakistan’s fiscal behavior is consistent with tax smoothing, but not Sri Lanka’s. Moreover, fiscal behavior in both countries was dominated by a stagnation of revenues, large tax-tilting-induced deficits, and the consequent accumulation of excessive public liabilities. Analysis of the time-series characteristics of tax-tilting behavior indicates that for both countries the stock of public liabilities is unsustainable under unchanged fiscal policies.

Keywords: Fiscal policy; Sri Lanka; Pakistan; Tax smoothing, tax tilting, fiscal sustainability, budget surplus, equation, fiscal deficits, government spending (search for similar items in EconPapers)
Date: 1999-05-01
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Handle: RePEc:imf:imfwpa:99/63