Government expenditure and private consumption in Pakistan

This article examines the role of the government in influencing private consumption. It is argued that government expenditures – whether on consumption-type goods or investment-type goods – adds to the welfare of private households. In other words, both types of expenditures can, in theory, be considered substitutes for private consumption, which is found empirically true for Pakistan. In addition, the strong negative effects of total government spending (as well as expenditures on consumption and investment) on private consumption suggest that households in Pakistan have behaved in accordance with the patterns predicted by the Ricardian equivalence theorem.