Tax-Spend or Spend-Tax? The Case of Southern Africa

Abstract

Whether to increase taxes or cut spending is an important question with profound policy implications, especially as countries attempt to deal with the consequences of the COVID-19 pandemic. This study, therefore, investigated the relationship between revenues and spending in the Southern African Development Community (SADC), where concerns about rising debt and deficits were raised prior to the pandemic. A panel bootstrap Granger-causality technique was used to analyze annual frequency data covering the 1980–2018 period. To our best knowledge, this was the first study in Africa to simultaneously account for cross-country differences and cross-section dependence. The findings of the study have in-depth implications for fiscal policy and adjustments towards budgetary equilibria. The study found no evidence of causality between revenues and spending in eleven SADC member states, suggesting that to balance their respective budgets, governments in these countries can alter either spending or revenues, or both. However, in Botswana, we found evidence of the tax-spend hypothesis, implying that governments should consider altering revenues to eliminate budget imbalances. Finally, evidence of the spend-tax hypothesis was found in Mauritius and Mozambique, suggesting that past and current expenditures drive revenues in these countries. Accordingly, cutting spending would be an ideal policy recourse to deal with budgetary disequilibrium.

An analysis of the government revenue–expenditure nexus: A wavelet approach for the Romanian case

“…The paper emphasizes the periods in which various measures and policies were developed by the Romanian government. The tax-spend hypothesis is confirmed for specific periods, which means that policymakers should focus on changing the level of budget revenues/taxes to reduce budget imbalances (Nzimande & Ngalawa, 2022) and adopt measures to optimize taxation (Febriani & Rambe, 2022). For other periods, the spend-tax hypothesis is confirmed, which means that policymakers should focus on reducing expenses (Nzimande & Ngalawa, 2022), representing a fundamental approach in designing the fiscal policy (Bröthaler & Getzner, 2015) with government priorities regarding the spending component of fiscal policy and adjustments in the level and structure of public spending (Tiwari & Mutascu, 2016).…”