Unraveling the Dynamic Nexus: A Time-Varying Analysis of Government Revenue and Expenditure in Algeria (1980-2022)

Abstract

This study investigates the evolving causal relationship between government revenue and expenditure in Algeria from 1980 to 2022, a period marked by significant fiscal policy shifts. Unlike previous research assuming a static relationship, we employ a bootstrap rolling window approach and spectral Granger-causality test to capture time-varying causality. These methods illuminate the dynamic nature of fiscal interactions in Algeria's changing economic landscape. Our findings robustly support the tax-spend hypothesis over extended periods, revealing that government revenues significantly influence expenditure patterns. Notably, from 1995 to 2003, we observe a positive effect on spending, coinciding with fiscal contraction and rationalization efforts. Conversely, despite declining tax revenues from 2005 to 2008, an expansionary fiscal policy increased spending, indicative of financial illusion. Interestingly, we also find intermittent short-term evidence supporting both the spend-tax and fiscal synchronization hypotheses, highlighting the complex and multifaceted nature of Algeria's fiscal dynamics. The spectral Granger-causality tests further corroborate these findings, particularly in the medium term. This study contributes to the literature on fiscal policy dynamics in resource-dependent economies and offers valuable insights for policymakers navigating Algeria's complex fiscal landscape. Our results underscore the importance of adaptive fiscal strategies that account for the time-varying nature of revenue-expenditure relationships, particularly in the face of oil price volatility and economic diversification efforts.