On The Estimation of Tax-Spend Debate In Algeria: Evidence From Nardl Modelling and Asymmetric Causality Test

Abstract

ABSTRACT:Since its independence, the Algerian economy has dealt with many crises, especially those related to the global oil markets, which are witnessing severe fluctuations, and since Algeria is a rentier economy these crises have threaten its fiscal policy in the last four decades. In such cases, policy-makers have to think wisely about any possible negative effects that may impact the economy through fixing the issue of the adjustment to both spending and revenues. Previous literature assumes a symmetric linkage between government spending and revenue. However, a variation on public revenue does not necessarily have the same impact on public expenditure, or vice-versa. Considering this possible asymmetry between the variables, the main purpose of this study is to examine the asymmetric relationship between government expenditures and revenues in Algeria over the period 1970–2018, and to confirm one of the four hypotheses linked to the tax-spend debate. To characterize asymmetry, this study uses the nonlinear autoregressive distributed lags (NARDL) approach of cointegration developed by Shin et al (2014) between these two variables in the adjustment process of the budgetary. Furthermore, we applied the asymmetric causality approach test using bootstrap simulations with leverage adjustments popularized by Hatemi-J, 2012; Hacker and Hatemi-J, 2012 to determine the causal relationship between variables. The findings provide evidence that suggests that there is a long-run relationship between government expenditures and revenues. To put it differently, in the long run, positives changes in revenue dominate the response of government expenditure. The same applies to the response of spending since positive changes in government expenditure are greater than negative changes. Asymmetric causality results supported a bidirectional causality pattern between public expenditures and revenues in Algeria, thus it supports the fiscal synchronization hypothesis in Algeria. The results of the research are important to increase interest in fiscal policy in Algeria, where under this hypothesis, the fiscal authorities of Algeria must try to raise revenues and work to rationalize public spending simultaneously to control the budget deficit.