The optimal size of government is an attempt at determining the extent of government role (without looking into its qualitative dimension) by applying optimization techniques on reallife data of public spending and taxation. The present study attempted to determine optimal size of government of Pakistan in balanced as well as unbalanced budget setting. Additionally, it explored the way budgetary deficit affects optimal size of government and deliberated upon as to which of the two approaches (i.e., balanced and unbalanced budget approach) is more suited to Pakistani context. The actual budgetary deficit data was used instead of arbitrarily assuming some figure. Moreover, for the purpose of estimation, the study employed co-integration technique instead of merely relying on OLS. Actually, the study used OLS on differenced variables and deployed co-integration to validate robustness of results. The results showed that in balanced budget setting the optimal level of taxation in Pakistan, while using OLS, is 18.87% of GDP. The Engel Granger two-step method not only confirmed the existence of long term relationship but also gave a largely consistent result i.e., 18.46% of GDP. The optimal level of spending in Pakistan, while using OLS, is 22.18% of GDP. Again, the Engel Granger two-step method not only confirmed the existence of long term relationship but also gave a largely consistent result i.e., 21.93% of GDP. In unbalanced budget setting, while using OLS, the optimal level of taxation was estimated to be hovering around 16 % depending on the level of fiscal deficit. It is, therefore, concluded that the unbalanced budget approach, allowing for fiscal deficit, is more suited to Pakistani context and calls for substantial improvement in tax effort. Supervisor:- Dr. Hafsa Hina