Does fiscal policy amplify or mitigate debt vulnerabilities? Evidence from Tanzania's government revenue and expenditure dynamics

This study examines whether fiscal policy amplifies or mitigates public debt vulnerabilities in Tanzania by analyzing how government revenue and expenditure shocks influence the dynamics and sensitivity of public debt accumulation across different debt regimes. Using quarterly data from 2003 to 2023, the study applies Autoregressive Distributed Lag (ARDL) and threshold regression models to capture both short-run fiscal responses and regime-dependent debt dynamics. The ARDL results show strong debt persistence and indicate that increases in government expenditure significantly raise public debt in the short run, while the impact of government revenue emerges only after several quarters. The threshold regression further reveals important asymmetries: under low-debt conditions, increased revenue effectively reduces debt pressures, whereas under high-debt regimes, fiscal expansion rapidly amplifies debt accumulation. The results also show that exchange rate volatility, inflation, and interest rates significantly influence short-run debt dynamics, reflecting Tanzania's exposure to macro-financial shocks. Overall, the findings suggest that Tanzania's debt dynamics are more sensitive to expenditure shocks than revenue improvements, highlighting the need for context-specific fiscal strategies, stricter expenditure management during high-debt periods, and stronger coordination between fiscal and monetary policies to maintain debt sustainability and macroeconomic stability.