Fiscal pro-cyclicality revisited: Global, regional, and country-level evidence with a spotlight on MENA

Fostering countercyclical fiscal policy is challenging, requiring policymakers to understand the specific drivers of procyclicality within each country's fiscal policy. This study contributes to such understanding by investigating the question of how different components of budgetary revenues and expenditures contribute to overall patterns of fiscal cyclicality. Using data from 184 countries between 2000 and 2022, we analyze global, regional, and country-level patterns, with a focus on the Middle East and North Africa (MENA) region. The cyclicality of each fiscal policy variable is estimated using the Hodrick-Prescott filter, employing a disaggregated approach that examines multiple fiscal policy variables and their subcomponents. Our findings indicate that tax revenues tend to be less countercyclical than non-tax revenues, and subsidy expenditures are less countercyclical than other spending categories. The effectiveness of countercyclical policy varies widely across countries and fiscal components, and evidence from country-level panel regressions suggests that the roles of different macroeconomic factors driving cyclicality differs between the expenditure and the revenue side of fiscal policy, emphasizing the need for tailored policy approaches. Several MENA countries notably transitioned from procyclical to countercyclical policy, demonstrating a potential path out of the “fiscal pro-cyclicality trap”.