and Qatar) that managed to switch from fiscal procyclicality to countercyclicality over the past two decades. This confirms previous findings in the literature suggesting that escaping the fiscal pro-cyclicality trap is possible and demonstrates that this is feasible even for countries in a region like MENA with very high output volatility.

When looking at different subcomponents of government revenue, we find that tax revenue and non-tax revenue in MENA countries featured similar cyclicality patterns but of different magnitudes, with non-tax revenue typically moving more strongly with the business cycle than tax revenues (which is a desirable outcome for revenues under countercyclical fiscal policy). On the spending side, we find that subsidy expenditures in MENA countries tend to be less countercyclical (more procyclical) than other fiscal expenditures (an undesired outcome for revenue under countercyclical fiscal policy). Our findings give rise to implications for policies aimed at making fiscal policy more countercyclical, which we discuss in detail below.

# **3. Data and methods**

The existing literature uses various policy variables to analyze fiscal cyclicality, including government spending, revenue, and fiscal balance (or deficit). On the revenue side, it is often argued that (tax) revenues are endogenous to the business cycle and tend to support countercyclical fiscal policy simply as a result of the widened tax base during times of expansion (Vegh & Vuletin 2015, Bashar et al. 2017). This suggests that, in evaluating the performance of fiscal policy decisions on the financing side, tax rates rather than tax revenue should be considered. However, comparable cross-country data on tax rates are not readily available (Bashar et al. 2017).<sup>1</sup> To ensure the robustness and greater granularity of our conclusions, and to shed light on how some countries managed to escape the fiscal pro-cyclicality trap, our study analyzes multiple fiscal policy variables side-by-side. Specifically, the main fiscal policy variables considered in our empirical analysis are government total expenditure, government revenue, and overall fiscal balance. We also consider revenue as a share of GDP as an alternative to tax rates, as an increase in both indicators during economic expansions and a decline during recessions points towards countercyclical fiscal policy measures. In addition, we zoom in on particular subcomponents of government spending (subsidies, grants, and other social benefits) and of government revenue (tax vs. non-tax revenue).

The data used in this study are publicly available from the following sources (we subjected the data to consistency checks). Annual data for general government revenue (percent of GDP) and general government total expenditure (percent of GDP) come from the International Monetary Fund’s World Economic Outlook database (IMF 2023). Annual data for tax revenue (percent of GDP) come from the IMF’s World Revenue Longitudinal Dataset (IMF 2022). Annual data for subsidies including grants and other social benefits (percent of GDP),<sup>2</sup> real GDP (constant local currency unit, LCU), and real GDP per capita

> 1 Building their own dataset on tax rates for 62 countries for the period 1960-2013, Vegh & Vuletin (2015) find tax policy to be acyclical in industrial countries but mostly procyclical in developing countries. However, their dataset covers very few low-income countries, which are of particular interest in our study.

> 2 More precisely, the subsidy variable includes all unrequited, nonrepayable transfers on current account to private and public enterprises; grants to foreign governments, international organizations, and other government units; and social security, social

~ 4 ~