The Dynamic Relationship between Tax Reform and De Facto Fiscal Space in Algeria: A Fractional Cointegration Approach

Abstract

This study aims to analyse the dynamic interaction between the actual fiscal space and tax reform in Algeria during the period 1990–2022, using quarterly data and applying the partial integration vector autoregressive (FCVAR) model. Despite the growing interest in studying the fiscal space in rentier economies, the current literature on the relationship between tax reforms and the evolution of the de facto fiscal space in Algeria remains limited, leaving a knowledge gap that requires further research. The study aims to fill this gap by providing an in-depth quantitative analysis that employs the FCVAR methodology, which enables the capture of characteristics associated with long memory and fractional integration, making it suitable for studying this complex relationship. The study also highlights the extent to which tax reforms impact the stability and sustainability of the fiscal space, given the fragility of the Algerian financial system and its historical reliance on oil revenues. The results reveal the existence of a long-term equilibrium relationship between the two variables, with a long memory (d^=1.357) reflecting the persistence of the impact of fiscal and tax shocks, in addition to a slow adjustment mechanism (α^=-0.014) that demonstrates the weak ability of the economy to return to equilibrium after any deviation. The scientific contribution of this study is to present an applied model that combines a modern methodology (FCVAR) and addresses the problem of financing the financial sector in the context of a rentier economy experiencing fluctuations in oil revenues. The study also provides actionable results that contribute to guiding decision-makers in adopting tax reforms that diversify the tax base, improve tax compliance, and enhance coordination between fiscal and tax policies to ensure financial sustainability and greater flexibility in facing economic fluctuations.