Econometric Modeling of Fiscal Imbalances: A Panel Regression Analysis of Revenue-Expenditure Dynamics and Debt Sustainability in Developing Economies

Abstract

This research applies an econometric approach to the study of fiscal imbalances in developing countries with an emphasis on the interaction of the revenue-expenditure gap and its interplay with the sustainability of debt. The panel regression model analyzes available data from Pakistan, Bangladesh, Kenya, Ghana, and Nigeria spanning 2000–2023, where we examine the relationship of government revenue, public expenditure, rate of growth of GDP, debt to GDP ratio, inflation rate, and other variables on the fiscal deficits of the government. Deficits are reduced modestly with revenue mobilized, especially to a lesser extent in Ghana (β = -1.44) and Kenya, while inefficiently allocated expenditure apportionment worsens fiscal strain. There are serious issues on the sustainability of debt as the increase in the level of debt has greater deficits (β = 1.28 -1.39) while inflation weakens the position in terms of increasing the cost of borrowing. An analysis of a scenario is Nigeria’s spending on growth creating expenditures as opposed to expenditures on tax in Bangladesh. Simulation of policy suggests tax administration improvement toward more productive spending as well as spending anchored in debt ceilings, followed with more productive allocation of expenditures. Blending econometrics with development strategy offers an alternative for decreasing deficits without increasing inequity in resource scarce environments.