Non-homothetic preferences, optimal public finance policy, and structural transformation

This study uses a comparative perspective to investigate how fiscal policies and budgetary mechanisms influence structural economic changes. By constructing a theoretical model rooted in the government’s non-homothetic preferences, we analyze how fiscal variables such as the tax burden, public deficit, and debt levels asymmetrically impact both intensive and extensive economic transformations across various regional settings. Our empirical study, leveraging panel data over time period ranging from 2010 to 2022, identifies region-specific fiscal thresholds that define optimal ranges for these budgetary tools. The results highlight distinct patterns in the fiscal impact across regions as well as the institutional frameworks shaping the relationship between budgetary factors and structural transformation outcomes.This study reveals that fiscal policy influences economic development in regionally differentiated ways. While tax increases tend to hinder growth in CEMAC countries, they prove more effective in North Africa, where institutional quality is stronger. Budget deficits, in turn, display a non-linear relationship with development: when too large, they restrict investment capacity; when too small, they limit essential public spending. In sub-Saharan Africa, estimated fiscal thresholds, 12.7 percent for tax-to-GDP and 42.8 percent for public debt, mark a turning point beyond which returns diminish. To optimize outcomes, policymakers must design strategies that integrate institutional strengthening, sustainable investment, and effective, corruption-resistant revenue mobilization.