Financing public expenditure : role and cost of non-tax revenue of financial repression

Abstract EN

Financial repression has long been as considered an implicit tax granted to the authorities in the form of government revenues.

However, if financial repression generates important implicit revenues for the government, it must be admitted that these benefits come have a cost that governments often ignore.

This article discusses the role and cost of non-tax revenues of financial repression in financing public expenditure.

Two types of non tax revenues involved in public debt are considered, which constitute a budgetary constraint of government is: the income from financial repression and the inflationary tax.

Using annual data, a VAR model is constructed to estimate the impact of these revenues on Algerian public expenditures.

The results indicate that effect of the income from financial repression and the inflationary tax is negative on short-term public expenditures.

Extending the VAR model to the VEC model allows long-term analysis.

The empirical estimate of the VEC model indicates that the inflation tax has a positive effect on total government expenditure while the effect of income from financial repression is negative on total government expenditure.

Based on the results of the estimation, the causality tests, the impulse analysis and the theory of the implication of the public finances in the financial repression, the main conclusion is that at short run, public expenditure are financed in large part by revenues non tax of financial repression.

But in the long run, these benefits generated by financial repression translate into a higher cost in terms of public spending