The Role of Fiscal Policy and Financial development in restoring economic growth in Pakistan

This research examines the impact of fiscal policy instruments and financial development on economic growth in Pakistan from 1981 to 2022 using the Vector Error Correction Model (VECM). The results show a long-term relationship between response and explanatory variables, with government recurrent expenditure significantly enhancing the growth of the Pakistani economy. However, government capital expenditure, tax financial development, and inflation significantly depressed the economy's growth in the long run. In the short run, government recurrent expenditure, financial development, and taxation encouraged the economy's growth, while government capital expenditure and financial development inhibited it. The findings suggest that Pakistan's fiscal policy drive has not yielded to expectations in driving the economy, both in the long and short run. Policymakers should incentivize financial institutions to extend services to underserved areas and introduce tailored fiscal incentives, such as tax benefits for opening branches in rural or economically underdeveloped areas. Additionally, an institutional quality drive is needed to combat corruption, maintain regulatory quality, and observe the rule of law, which will stimulate fiscal policies and drive economic growth in Pakistan.