The oil cycle and the tax-spend hypothesis: the case of Angola

Abstract

The intertemporal relationship between oil revenues, real government spending and real output over the oil cycle is investigated for the case of Angola, the second largest oil producer in Sub-Saharan Africa. The results of a trivariate VAR, impulse response functions and variance decomposition analysis provide empirical support for the tax-spend hypothesis. In addition, the Angolan economy is found victim of the resource curse, as real output does not respond to aggregate demand shocks such as changes in real government spending. The policy implications for Angola are 2-fold. First, to alleviate the constraints associated with the resource curse, Angola needs to find ways to diversify its economy. Second, given the direction of causality found between government expenditures and oil revenues, in order to avoid fiscal disequilibria, efficient management of oil revenues is as important as controlling public spending.

Panel data modelling and the tax-spend controversy in the euro zone

“…Taking into account the validity of the tax-spend hypothesis, he suggests that tax cuts stop growth in government expenditures leading to the reduction of budget deficits. Bohn (1991), Darrat (1998), Chang et al (2002), Narayan and Narayan (2006), Carneiro (2007) and Payne et al (2008) have argued in favour of the tax-spend hypothesis.…”