General Budget Support and Tax Revenue Instability in Developing Countries

Abstract

The main thrust of this article is to investigate the effect of general budget support (GBS) resources on tax revenue instability in recipient-countries, including when the latter experience higher economic growth volatility and higher terms of trade instability. The empirical findings suggest that GBS flows exert a negative effect on tax revenue instability, with the magnitude (in absolute value) of this negative effect being lower in Sub-Saharan African (SSA) countries compared to NonSSA countries in the sample. Additionally, the magnitude of the negative effect of GBS resources on tax revenue instability increases as countries experience higher economic growth volatility or greater terms of trade instability. It is worth noting that the magnitude of the GBS effect on tax revenue instability is small, including compared to other development aid inflows. Thus, from an economic perspective, GBS flows exert a lower effect on tax revenue instability than do other development aid flows.