Though aid continuously plays important role in
developing countries for example through 
channeling resources; improvement faces by the third world countries is
very much disappointing (Njeru, 2003).There are two
reasons behind the negative relationship between aid and spending. First,
reverse causality that means low expenditures in recipient countries along with
prompt donors to disburse more aid to such countries which results endogeneity.
Second one is donors’ conditionality,
which results reductions in spending (Tagem, 2017).

 

Different studies on aid and government spending
focus a problem termed as fungibility. Fungibility refers diversion of aid away
from its intended uses for investment and development. That means using the aid
in such sectors which was not specified by the donors. This factor limits aid
effectiveness in stimulating growth. (Foster and Fozzard, 2000; Njeru, 2003;
McGillivray and Ouattara, 2005; Morrissey, 2012). Moreover, fiscal effects of
aid are country-specific and donors are always concerned about the uses of aid
and incorporate new conditions’ which also influence government spending
negatively (Morrissey, 2012).

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3.3
Impact of Debt on Government Spending

Over
many years, most developing countries face the problem of twin deficits because
they have failed to collect enough revenues to finance their budgets. So to
meet the spending they rely on debt flows (Akram, 2016). That refers to the
positive aspect of debt servicing on the other hand aid has direct aid and
positive impact because of providing considerable amount of GDP. Moreover being
a help from the donors, there is no chance of indebtedness in case of aid
circulation in government spending and thus it does not influence fiscal
behavior of the countries (Morrissey, 2012).It is suggested that the inflows
will successfully and positively influence the developing countries only with
the help of proper blending and implication good fiscal as well as monetary
policies (Burnside and Dollar, 2000).

 

Debt has also negative impact on government spending
because huge amount of the budget as well as foreign aid use to repay the
loans. For example, it was estimated that South Asia is indebted to over $180 billion
and 25 percent of exports are used to repay debt services which constitutes
more than 2 percent of their GDP. With passing time this situation did not
change very much but somehow increase the dependency (Chaudhury and Anwar,
2000; McGillivray and Ouattara, 2005). Moreover, excessive debt burden
influence the government behavior and actions of a country through creating
vicious cycle, excessive inflationary financing, excessive taxation on some
sectors in the economy. These negativities also reduce the foreign investment in
the productive works of the country (Cassimon and Van Campenhout, 2007). The
increasing size of debt only increase uncertainty moreover the resources which
can be used for development activities using for the repayment of the loan
which is not a good indication for the economy of the developing countries.

 

3.4
Impact of Tax Revenue on Government Spending

The
relationship between tax revenue and government spending is always given
significant importance in economics. The relation is the base of the budgetary
process of a country as tax revenue is regarded as the source of domestic
financing of a country and has impact on government spending (Mehrara et. al.,
2011). For sound fiscal policy the relationship between tax revenue and
spending is a must to know (Eita
and Mbazima, 2008). Over the decades, the relationship between this two is the
most analyzing aspect of economics as well as public finance for certain
reasons. Around the world especially in Asian countries it has huge importance
from the policy point of view (Eita and Mbazima, 2008; Mehrara et. al., 2011).
In this regard, causal relationship between revenue and spending is the most
debatable issue (Eita and Mbazima, 2008; Taha and Loganathan, 2008; Maharaja
et. al., 2011). The analysis of this issue is very much debatable and there are
four propositions behind it. The first one is tax-and-spend school, second one is spend-and-tax school, fiscal synchronization
hypothesis is the third one and the fourth and final school is fiscal
neutrality school (Chang and Chiang, 2009; Mehrara et. al., 2011). The role of
government and for the evaluation of it understanding the relationship of these
two is very important (Chang and Chiang, 2009).

 

 

 

3.5
Foreign Aid, Debt, Tax Revenue, Government Spending and Economic Growth

Undoubtedly
there exists relationship between foreign aid, debt and governments spending
with economic growth of a country as these are the most important factors of
macroeconomic perspective. The relationship or impact on economic growth of
these macroeconomic variables are important irrespective of the income level,
social and political condition or the amount of natural resources that one
country has. In case of developing countries the impact is very much evident as
they get a huge amount of aid and debt every year and it makes changes in the
patterns of government spending. Most importantly foreign aid and debt are
given to the recipient countries (developing) with a view to promoting economic
development and welfare of the country and the economic development is measured
by what extent of economic growth has taken place in the country (Durbarry et
al., 1998).

 

3.5.1
Foreign Aid and Economic Growth           

Over
the years, the developing countries always try to promote economic growth and
reduce poverty by receiving huge foreign aid from the donor countries because
in the way of development it constitutes an integral part in those countries.
This situation is very much evident in the developing countries especially in
Sub Saharan Africa as well as South Asian economies but only little development
has taken place that means few success stories (Chaudhury and
Anwar, 2000 ; Njeru, 2003). In the South Asian
economies from the context of receiving and contributing to the economies
foreign aid plays very important role and thus the relationship with economic
growth also become an important issue (Asteriou, 2009).

           

Aid
improve the governments quality and have positive impact on economic growth
through creating scope for new revenues, developing the quality of civil
service, reinforcing policy and planning capacity and making strong central
institutions for example South Korea and Taiwan. It also affects negatively by
blocking governance system and weakening the institutions rather than making them
more efficient (Bra¨utigam, 2004). Problems of
fungibility, donors’ conditionality and country specific problems are also
there. These positivity and negativity makes
aid effectiveness a debatable issue (Foster and Fozzard, 2000; Njeru, 2003;
McGillivray and Ouattara, 2005; Chatterjee et al., 2012; Morrissey, 2012).

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