Governance and Fiscal Sustainability: Evidence from Developed and Emerging Economies

The quality of governance is a key driver of resource mobilisation in a context marked by successive shocks that exacerbate fiscal imbalances. This study aims to analyse the role of institutional quality in the relationship between public expenditure and tax revenue in a panel of 162 countries, broken down into developed and emerging economies between 2000 and 2023. Using Dumitrescu and Hurlin's (2012) causality tests and the cross-sectional autoregressive model with staggered lags (CS-ARDL) to control for cross-sectional heterogeneity and cross-dependence, the results reveal a bidirectional causality linking expenditure and revenue for the entire panel; emerging countries are more sensitive to fiscal policies; public expenditure significantly stimulates tax revenue in the short and long term, with an effect amplified by institutional quality; long-term sustainability depends crucially on the institutional framework. This study highlights the need for targeted institutional reforms and fiscal rules differentiated according to countries' level of economic development.