Political Instability and the Budget Deficit in Economy: A Case of Pakistan

This paper aimed to explore the impacts of political instability on budget deficit in the economy of Pakistan. Budget deficit is harmful for every economy and is responsible for high inflation in the world especially in developing and third world countries. Both qualitative and quantitative techniques have been used. Budget deficit, Trade deficit, political instability and exchange rate are used as variables. Time Series Test, Uni Root Test, Johansen co integration technique and error correction model were used to analyze the data to reach the required results. Unstable political environment reduced investment and the speed of economic development. Therefore, Political stability play a vital role for the stable polices for budget, under the unstable political conditions, political polarization and coalitions cause some lags in reform processes which, in turn result in budget deficits. This study recommends that government should maintain the political stability which will encourages the domestic and foreign investors. Improved business and economic conditions will be helpful in reducing the budget deficit.