Spend Now, Pay Later? Tax Smoothing and Fiscal Sustainability in South Asia
Author | : International Monetary Fund |
Publisher | : International Monetary Fund |
Total Pages | : 35 |
Release | : 1999-05-01 |
ISBN-10 | : 9781451848403 |
ISBN-13 | : 1451848404 |
Rating | : 4/5 (03 Downloads) |
Book excerpt: 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.