Asymmetry Effect of Tax and Public Debt on Private Consumption Spending in Russia

Dhyani Mehta and Valentina V. Derbeneva

Journal of Tax Reform, 2023, vol. 9, issue 3, 359-375

Abstract: According to the Ricardian Equivalence theory, private consumption spending is unaffected by the debt vs tax mode of deficit financing. The study re-examines the “Ricardian Equivalence” hypothesis in Russia by using private consumption spending as the dependent variable and government expenditure, government borrowing, tax, and income as the independent variables. The Ricardian position offers an intriguing issue in the Russian setting. If the Russian economy exhibits Ricardian equivalence, the private sector will shift its spending habits and boost its savings, rendering the policy reforms ineffectual. The ARDL and NARDL models used yearly time series data between 1988 and 2022. The results refute the Ricardian Equivalence and support the Keynesian perspective that financing the fiscal deficit (debt vs tax) does affect private consumption spending. The estimates support a strong long-run and short-run link between the variables. Estimates confirm that tax and borrowing mode of deficit financing negatively influences Russia’s consumption spending. It shows that short-run disequilibrium converges to long-run equilibrium in the ARDL model at a rate of 85.3% and in the NARDL model at a rate of 28.6%. The study concludes that the deficit financing strategy should be carefully devised and supported. Implementing an expansionary fiscal policy will influence the overall private demand of Russia. A tendency to rely too much on tax and borrowings as a financing technique negatively influences private consumption spending. This study contributes to the pool of literature on “Ricardian Equivalence” and deficit financing by providing new data on how to formulate fiscal policies that are efficient at financing deficits and sustainable by making prudent expenditures without endangering the nation’s private consumption.

Keywords: ARDL; NARDL; consumption spending; deficit financing; Ricardian equivalence; government borrowing; fiscal policy; fiscal deficit; Russia (search for similar items in EconPapers)
JEL-codes: F31 F63 H3 H5 H6 H62 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:aiy:jnljtr:v:9:y:2023:i:3:p:359-375

DOI: 10.15826/jtr.2023.9.3.147

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