Does External Debt Being a New Factor of Fiscal Policy Influence a Long-Term Income-Inequality in Pakistan?

Abstract

One of the most important and difficult economic variables that slow down a nation's economic progress is external debt. An economy where the wealth disparity between rich and poor is considerable will be significantly impacted by debt. A crucial macroeconomic measure of an economy that explains the equitable allocation and distribution of resources among the masses is the GINI index of any nation. The UN SDGs' ultimate objective is to reduce income inequality among the general population of the world's countries. By considering the debt to GDP ratio, this study studies the effect of debt burden and its extensive effects on the inequality of Pakistan's residents. The most popular method of generating income for debt repayment is taxation. The ARDL model is used in this work to investigate the short- and long-term estimations of the debt-inequality nexus. The study concludes that debt raises the burden on the general public in the form of high taxes, and as a result, an increase in the tax-to-GDP ratio causes Pakistan's inequality index to rise. Despite the reliance on internal fund collection in the form of a tax, the study proposes opening up international trade and domestic industry to increase the revenue inflow.