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

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.
Publication date: May 1999
ISBN: 9781451848403
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Economics- Macroeconomics , Economics- Macroeconomics , Tax smoothing , tax tilting , fiscal sustainability , budget surplus , equation , fiscal deficits , government spending

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