Understanding the Dynamics of the Fiscal Landscape Through Institutional Lenses: A Case Study of South Asia

Abstract

Tax revenue is crucial for governments to finance essential expenditures, social welfare programs, and infrastructure development, which are vital for economic advancement and social well-being. A high tax-to-GDP ratio indicates a strong fiscal position and substantial revenue, which are fundamental for maintaining financial stability and ensuring long-term sustainability. Every country aims to enhance its revenues through various reforms. This study conducted a comprehensive analysis of tax reforms in selected South Asian economies from 2002 to 2022, focusing on their influence on the tax-to-GDP ratio. The outcomes of the Breusch-Pagan and Hausman tests suggest that the Random Effects Model (REM) is suitable for this estimation. Findings of the REM reveal significant and positive associations between government effectiveness, law and order, political stability, and tax-to-GDP share, as one percent rise in the respective variables leads to 3.3%, 1.5%, and 2.02% per one percent improvement in the tax-to-GDP share. The Dumitrescu-Hurlin Panel Causality Tests find no homogeneous causality among related variables. Recommendations include prioritizing government effectiveness, improving the law-and-order situation, maintaining political stability, and enhancing GDP growth to boost tax revenues. Future research will focus on optimizing fiscal policies and revenue mobilization strategies in the region.