Fiscal policy thresholds for inclusive economic growth in sub-Saharan Africa

Purpose This paper determines the threshold effect in the relationship between inclusive growth (IG) and key fiscal policy instruments, including tax revenue, government debt, general government expenditure, investment spending, and fiscal redistribution, using a panel sample of countries in sub-Saharan Africa (SSA). Design/methodology/approach The paper applies the dynamic panel threshold approach with endogenous regressors. Findings The study confirms non-monotonicity and non-linearity in the relationship between government debt, government expenditure, and IG, as operating below their determined threshold levels enhances IG; however, their positive effects fizzle out by negatively impacting IG above the threshold values, supporting the Armey and debt overhang hypotheses. The study finds that the inverted U-shaped Armey curve is not always sacrosanct. It also finds a monotonic relationship between investment spending components and IG since there are no reversals in the signs of the upper and lower investment regime-dependent coefficients. Though the magnitude of the upper investment regime is more than four times that of the lower regime, this makes investment expenditure at the upper regime substantial for stimulating IG. The marginal impact of tax revenue on IG is twice as large under the upper tax revenue regime compared to the lower regime, reiterating that raising the efficiency of collection and pushing the tax frontier to higher levels is pivotal. The study further finds that fiscal redistribution has more marginal benefits at the upper regime, necessitating the need to improve the progressivity of taxation to enhance equity growth. Originality/value The study extends the literature by examining how different fiscal policy instruments affect IG in SSA. It identifies the threshold levels beyond which fiscal policy turns from good to bad. It incorporates a rarely explored instrument, fiscal redistribution, and demonstrates its non-monotonic effects on IG.