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

Author/Editor:

International Monetary Fund

Publication Date:

May 1, 1999

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 99/63

Subject:

English

Publication Date:

May 1, 1999

ISBN/ISSN:

9781451848403/1018-5941

Stock No:

WPIEA0631999

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

34

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