Though
South Asian countries are now emerging economies the reliability on official development assistance in the form of aid,
loan and grants contains a large extent of importance as the source of finance.
Basically, the amount of severely poor people made the South Asian countries so
much dependent on foreign aid and loan. Thin tax bases, narrow export earnings
and low savings also increase the importance of aid and loan in South Asia. So,
naturally the flow of foreign aid and debt influence the pattern of government
spending. It is worthy to mention that now a-days the donor countries become
very much strict about giving the official development assistance and also put
emphasis on fiscal discipline and good policies of the recipient countries
(Njeru, 2003).

 

On the other hand, tax revenue is
the most important and highly dependable source of government revenue as well
as spending for all over the world (Taha and Loganathan, 2008; Martinez-Vazquez
et al., 2012). Though a larger tax revenue always give the main funding portion
for government spending, the amount of it is very much negligible in South
Asia. So, big budgetary deficit appeared in front of the government and
automatically they try to grab more official development assistances.
Government can not spend adequately in the required areas because of too little
tax revenue which hinders economic growth. Most of the developing countries
always depend on tax revenue for development activities. Thin tax bases also
hamper the development activities like public infrastructure and investment in
different sectors as industry, health, education etc. (Martinez-Vazquez et al.,
2012).

 

With
this reality it has been observed that, developing countries have always given
enormous importance to the policies which attract foreign capital through aid
and loans. In a general sense, for enhancing investment as well as accelerating
economic growth these are unbeatable. But now the question of aid effectiveness
has been raised and the debate starts at the point on how aid inflows affect
the fiscal behavior of the recipient government.  In case of aid flows, problem of fungibility
appears which defined the situation where recipients use aid for purposes other
than those recommended by the owners (Foster and Fozzard, 2000; Njeru, 2003;
McGillivray and Ouattara, 2005; Chatterjee et al., 2012; Morrissey, 2012). Other
country specific problems are also included into it and put pressure on the
economy.

 

Along
with these the biggest threats for maintaining economic stability in South
Asian economies is the legacy of debt. There is no doubt in this matter as
South Asia is indebted to over $180 billion. 25 percent of exports of South
Asia are being washed away by debt. The foreign debt has surpassed 200 percent
of exports earnings which also constitutes more than 2 percent of their GDP. In other words, about 2 percent of GDP is
being just vanished by the debt services. So, with poor economic conditions
such a situation is very alarming in South Asia (Chaudhury and Anwar, 2000).

 

With
limited tax revenue most of the South Asian countries budget has a vast amount
of money in form of aid and debt which is a clear indication of the impact on
government fiscal behavior. This behavior particularly points on government
spending. It also gives proof that aid is a vital source of revenue (Ouattara,
2006; Herzer and Morrissey, 2013) to them (the government) who do not have the
sufficient amount of money to finance or use in development needs.  On the other hand, debt influence spending as
well as creates liability for the government by which developing countries like
the South Asian really suffers a lot. So, the large amount of aid and debt
going through recipients’ budgets should have a direct effect on different
expenditure headings that is government spending (Morrissey,2012; Herzer and
Morrissey, 2013; Tagem, 2017).
Not only directly but also indirectly in the form of the policy conditions of
the donor’s government spending is being influenced by aid and debt (Tagem, 2017). Government spending is also
very much influenced by tax revenue irrespective of country size and any kind
of national differences (Oboh and Isa, 2012). That means, government
spending has effective relation with all these macroeconomic variable.

 

It has been detected that, there is huge evidence on
the perspective of domestic resource mobilization, tax and foreign aid, tax
revenue and economic growth, foreign aid and debt and its impact on economic
growth but the researcher hardly finds any research based on government
spending in South Asia. Foreign aid and debt both term creates huge
controversies in terms of aid effectiveness, fungibility and loan repayment. On
the other hand, tax revenue is facing problems for its thin bases, tax policy
and administration that means the overall system of it which exists in South
Asia. These controversies influence the government’s fiscal behavior in some
cases positively, negatively or both. The positivity or negativity also
influenced by the amount of aid, debt and tax revenue as well as the sector in
which it is using.

 

1.2
Objective of the Study

              The study is directed to attain
the main objective:

Ø  To
examine the effects of foreign aid, debt and tax revenue on government spending
in South Asia

 

1.3 Justification of the Study

Foreign aid, debt and tax revenue are the key
fuel for government spending as they are the source for financing. So,
undoubtedly they are related to each other. Aid as well as debt has
considerable share for the constitution of GDP.  Both of them provides good amount for
enhancing economic growth. In this perspective the most unavoidable variable is
tax revenue and it is the the domestic source of earning. Though all the three
variables have their particular role for the constitution of the amount of
government spending, a large portion of it in most developing countries is the
summation of aid flow and debt (Morrissey, 2012). Tagem (2017) made a
generalization with accordance to the fact and give it a form of equation that
is