# **5. Conclusion and policy implications**

Using an expanded and updated dataset for 184 countries in the period 2000-2022, this paper contributes to the existing evidence on fiscal policy cyclicality across the world. A more granular assessment of the direction, intensity, and sources of cyclicality of fiscal policy is provided, with particular focus on countries in the MENA region, including those that managed to switch from procyclical to countercyclical fiscal policy during the past two decades. High-income countries are found to generally have led countercyclical fiscal policy compared to low- and middle-income countries where it is found to be predominantly procyclical or neutral.

In a novelty to the literature, breaking down revenues to tax and non-tax revenues and expenditures into subsidies (including grants and other social benefits) and other fiscal expenditures, we show that non-tax revenues tend to be more in line with countercyclical fiscal policy than tax revenues. This is likely the result of relatively weak automatic stabilizers within the tax system (e.g., progressive income taxes, unemployment insurance, capital income taxes) and this seems to be especially the case in low- and middle-income countries, including those in the MENA region. On the expenditure side, countercyclical fiscal policy in MENA countries is less supported by subsidies, grants and other social benefits (which exhibit weak countercyclicality) than by other spending categories. This may also be a result that subsidies in many countries operate more as a fixed entitlement, fairly independent of the business cycle rather than discretionary expenditures that respond to the cyclical changes in output.

Within the MENA region, we find that many countries show procyclical fiscal policy, consistent with the literature. At the same time, we also identify several countries (notably Jordan, Oman, Qatar) which recently managed to shift from procyclical to countercyclical fiscal policy. Nevertheless, many low- and middle-income countries, in MENA and the rest of the world, continue to follow procyclical behavior, potentially being caught in a fiscal pro-cyclicality trap whereby fiscal policy is _persistently_ procyclical, thereby reinforcing the business cycle and adding further instability and uncertainty to the economy (Vegh & Vuletin 2015, Herrera et al. 2019).

Achieving strong countercyclical fiscal policy faces many challenges, including tax system structure, timing of policy decisions, fiscal space, financing constraints, and other political or external economic influences (Alesina et al. 2008, Frankel et al. 2013, Bogetić & Naeher 2024b). However, there are a number of policy measures proposed in the literature that policy makers can adopt to enhance countercyclicality. We review these here and add to them in view of the new evidence in this paper.

First, governments can design policies supporting greater use of **automatic stabilizers** such as progressive income taxes and unemployment benefits, helping limit economic overheating in good times and reducing slumps in bad times (Bashar et al. 2017, Aizenman et al. 2019). Increased use of ad-valorem rather than specific excises, where possible, might also increase responsiveness of the tax base of excised goods to the business cycle. Moreover, greater use of real estate taxes, which are typically a minor source of government revenues in low- and middle-income countries, especially in the MENA region, may increase the revenue contribution to the overall countercyclicality of fiscal policy. Combined, these measures may tilt the observed balance from non-tax to tax revenues as the key contributor to the countercyclical fiscal ~ 14 ~