The fiscal sustainability of Arab countries has been significantly challenged by the COVID-19 pandemic.
A uni-directional causal relationship exists where government revenue leads to expenditure, affirming the revenue–spend hypothesis.
Economic and crisis-driven structural breaks play a crucial role in the dynamics of government revenue and expenditure.
Governments need adaptable fiscal policies to mitigate the effects of unforeseen economic shocks and structural changes.
Arab countries should establish and adhere to strict fiscal rules to maintain budgetary discipline.
The Arab Monetary Fund published a study on "Fiscal sustainability in Arab countries". The study aims to shed light on the relationship between government revenue and government expenditure. The study analyses fiscal sustainability and the causal link between government revenue and expenditure for the period from 1990 to 2021 in a sample of Arab countries.
In this regard, the results of the econometric investigation showed that all countries had experienced at least one structural change in the relationship between government revenue and expenditure. However, the study demonstrated that the relationship between revenue and expenditure in Arab countries is not at the same pace. For instance, a country could be fiscally sustainable in a certain period and unsustainable in another, depending on whether there is a structural change in the economy or not. Another important finding was that various countries faced significant challenges in servicing their debt. The causality test revealed a unidirectional causality running from revenue to expenditure in most of the countries, suggesting that government revenue induced government expenditure decisions, which supports the revenue-spend hypothesis.
Given the study's findings, it contributes to our understanding of fiscal policy sustainability and the dynamics of the relationship between government revenue and expenditure in the Arab region. Moreover, it is important for government expenditure policies in Arab countries to be counter-cyclical in the sense that spending is higher in times of recession and lower when the economy flourishes. In addition, increasing tax revenues could be done through expanding the tax base rather than rising tax rates.
The full version of the study is available at the following link: