Does Democracy Come at a Fiscal Cost? Revisiting the Political Business Cycles in Pakistan

Abstract

The role of electoral incentives on public spending patterns is particularly relevant in developing nations such as Pakistan as it has direct bearing on the issue of fiscal discipline and quality of governance. This study examines the role of electoral cycles on sectoral budgetary allocations at provincial level in Pakistan. Based on panel data of four provinces covering the years 1972-2018, the study uses a Fixed Effects (FE) model to determine dynamic variations in budgetary patterns. These findings are quite solid in favor of the Political Business Cycle (PBC) hypothesis with the results showing that government spending rises by a large margin (23 percentage points of GDP) in election years. It also shows that population development and openness to trade have impact of high magnitude that is positive when it comes to government expenditure, and unemployment level has no significant impact. The
evidence shows a greater requirement of fiscal policies and institutional limits so as to put down opportunistic expenditure of the incumbent governments. Pakistan ought to think about institutionalizing long-term rules-based budgetary plans at provinces level to curb discretional expenditure during elections. Opportunistic fiscal expansions could be hindered by legal provisions making statutory budget ceilings obligatory before elections. Lastly, adopting practices of participatory budgeting on a local government level would increase citizen involvement and responsibility, which would minimize the room on fruitlessly spending money based on political interests