The study examined the effect of institutional development and fiscal policy on real economic growth.It employed Generalized Method of Moments (GMM) techniqueto deal with potential endogeneity, which may arise in the presence of institutions. Principal Component Analysis (PCA) is used to construct an index of institutional quality. The real economic growth in Pakistan covering the period from1984 to 2018 provides ample evidences that(i) tax rates have negative and insignificant impact on real economic growth (ii) public expenditures on social indicators helps in augmenting real growth (iii) link between institutional quality and real economic growth is positive but insignificant (iv) increase in investment pushes up real growth and lagged value of GDP also helps in promoting growth (v) trade openness restricts real growth. Accordingly, it is suggested that government should enhance expenditures on social indicators and for that purpose there is need to increase tax to GDP ratio through expanding the tax base; not the tax rate and it is vital to restructure institutions which help to improve economic growth; i.e. accountability, equity, security and transparency.
Key words: Institutions, GMM, Political economy, PCA, Real economic growth.
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