Does Public Capital Expenditure Strengthen Tax Capacity? Evidence from Sub-Saharan Africa

Abstract

This study examines the vital fiscal relationship between government tax revenue and public capital expenditure in 34 Sub-Saharan African economies from 2005 to 2023, filling several important gaps in the current literature. This research recognizes the structural diversity of Sub-Saharan Africa by categorizing countries into low-income resource abundant, low-income agrarian, lower-middle-income, and upper-middle-income tiers, in contrast to traditional studies that regard Sub-Saharan Africa as a singular economic entity. The study moves the field forward by using a bootstrap panel Granger causality approach, which takes into account cross-sectional dependence and country-specific heterogeneity – things that standard linear models often miss because they use asymptotic distributions that aren’t good for the structural volatility of African markets. Furthermore, the analysis closes a compositional gap by isolating capital expenditure (such as power plants and roads) from total expenditure. This distinction is vital in the context of the post-2023 “funding squeeze”, as it clarifies whether tax mobilization is successfully creating long-term assets or is simply being absorbed by debt servicing and current expenses. The empirical findings reveal a complex, heterogeneous landscape: while many income groups exhibit fiscal synchronization – characterized by bidirectional causality between revenue and capital spending – low-income, resource-rich nations display varied patterns including tax-spend, spend-tax, and fiscal neutrality. These results indicate that a “one-size-fits-all” fiscal strategy is insufficient. In order to ensure sustainable infrastructure financing, the study offers a more detailed roadmap for 2026, recommending that nations in the synchronization and tax-spend categories concentrate on growing their tax bases, while those exhibiting neutral or spend-tax patterns should undertake structural reforms to stop tax revenue from leaking into unproductive expenses.