Exploring Fiscal Dynamics Between Resource and Non-Resource Tax Revenues in Oil-Dependent Countries

Abstract

The primary objective of this study was to investigate the asymmetric effects of resource tax revenues on non-resource tax revenues in oil-rich countries. This approach addresses a critical gap in the literature, as most previous studies have operated under the assumption of a symmetric relationship between resource and non-resource tax revenues. By challenging this assumption, the study aims to provide a more nuanced understanding of the fiscal dynamics in economies heavily reliant on resource-based revenues. The asymmetric framework allows for an examination of whether increases and decreases in resource tax revenues have differing impacts on non-resource tax revenues, thereby capturing the complexities and potential fiscal vulnerabilities of oil-dependent economies. Understanding these dynamics is crucial for policymakers in oil-rich countries as they strive to design resilient tax systems capable of withstanding fluctuations in resource revenues, ensuring fiscal sustainability and economic stability in the face of volatile resource markets. The findings reveal a negative relationship, indicating that increases in resource tax revenues are associated with decreases in non-resource tax revenues over both time horizons. This suggests a substitution effect, where reliance on resource revenues may crowd out efforts to generate non-resource tax revenues. To further explore this relationship, a nonlinear ARDL model was utilized, providing robust evidence of an asymmetric effect. The empirical results demonstrate that the impact of resource tax revenue changes on non-resource tax revenues differs depending on whether resource revenues are increasing or decreasing. These findings underscore the complexity of the fiscal interplay in oil-rich economies, emphasizing that the effects of resource revenue fluctuations are not uniform and must be addressed through tailored policy measures to mitigate fiscal vulnerabilities and enhance revenue stability. The long-run analysis reveals that positive shocks in resource tax revenues negatively affect non-resource tax revenues, indicating that an increase in resource revenues reduces the incentive or effort to enhance non-resource tax revenue collection. Conversely, negative shocks in resource tax revenues do not result in a compensatory increase in non-resource tax revenues, suggesting a lack of fiscal elasticity or readiness to offset declines in resource-based revenues through other tax sources. Furthermore, the short-term effects are found to be more pronounced when resource tax revenues increase, highlighting a stronger immediate substitution effect. This implies that governments may temporarily shift their focus away from developing non-resource revenue streams when resource revenues are abundant, exacerbating fiscal dependence on volatile resource markets. These findings underscore the need for oil-rich economies to adopt proactive fiscal strategies that balance resource and non-resource revenue generation, ensuring long-term economic resilience and sustainability.