Financial deepening and fiscal capacity: new empirical evidence from the association of Southeast Asian nations

The current study examines the long-term effects of financial sector development (FSD) on the amount of tax collected (TAX). The study uses annual panel data from eight ASEAN nations between 2000 and 2023. The analysis was conducted by using the CS-ARDL model, and robustness was performed by alternative estimation techniques, i.e., FMOLS and DOLS estimators. The findings demonstrate that the growth of the financial sector has a long-term, statistically significant, and favourable impact on the mobilisation of tax revenue. By expanding the tax base, increasing activity in the formal sector, and decreasing opportunities for evasion, a healthy financial system increases tax collection. While inflation has a negative effect on fiscal performance, economic growth, sound governance, and FDI inflows positively contribute to revenue. The results imply that ASEAN governments ought to incorporate financial development tactics like enhancing credit availability, growing digital finance, and fortifying banking establishments into their more comprehensive budgetary plans.