Short- and Long-run Growth Effects of Fiscal Policy in Bangladesh

The potential interactions between government expenditure, taxation and growth are complex and manifold and thus, it gives rise to a constant debate about the growth-effectiveness of the fiscal policy, especially in developing countries like Bangladesh. Both the ARDL approach to cointegration and the error correction (ECT) coefficients confirm the existence of a stable long-run relationship between economic growth and fiscal variables. The ECT results also confirm that the disequilibrium for the GDP equation converges if any shock occurs in the short run. Results using the Granger causality test show that direct tax has two-way causal relationships with economic growth whereas indirect tax and revenue expenditure has a unidirectional relationship with GDP in the short run. In the long run, indirect tax has a negative effect and revenue expenditure and fiscal deficit exert positive effects on growth. Based on empirical findings, this study indicates the importance of collecting more direct tax as it guarantees higher growth through financing the revenue expenditure and improves equity of taxation due to the progressive nature of the direct tax.

Authors: Rahman, Sultan Hafeez; Siddiquee, Muhammad Shahadat Hossain
Type: Journal article
Year: 2022