Impact of Government Expenditures, Foreign Direct Investment and Budget Deficits on Economic Growth in Pakistan

Abstract

This research has investigated the impact of trade openness, foreign direct investment, budget deficit, and government consumption expenditures on the economic growth of the Pakistan economy based on data from 1986 to 2024. The research makes an effort that, in the short run, especially during economic downturns, deficits can improve welfare by increasing demand and supporting vulnerable populations. In the long run, however, constant and poorly managed deficits can weaken welfare by debt accumulation, inflation, and reduced investment. The regression results show that trade openness, foreign direct investment, and government final consumption expenditures have enhanced the growth of the Pakistan economy. On the other hand, the budget deficit has negatively affected the economic growth of the economy. The study has recommended that Governments should run deficits during recessions and surpluses during booms. Borrowed funds must be properly utilized for investments, research, and development. Finally, there should be a stable economic and political environment for more trade and to attract foreign direct investment.