Abstract

Financial development can strengthen public revenue collection while simultaneously expanding governments’ capacity to finance expenditure. Whether these processes improve the fiscal balance therefore depends on their relative strength, rather than on financial expansion alone. This study examines these relationships using an unbalanced annual panel covering 30 sub-Saharan African countries between 2005 and 2023. Separate dynamic equations for government revenue, government expenditure, and fiscal balance are estimated through system generalized method of moments. The analysis incorporates a comprehensive financial development index, real GDP per capita growth, their interaction, and relevant institutional, domestic, and external controls. Two-step estimates provide the principal results, with one step estimates used to assess sensitivity and dynamic coefficients used to derive long-run responses. Financial development is positively associated with both revenue and expenditure, but its estimated relationship with fiscal balance is statistically insignificant. Economic growth independently improves fiscal balance, whereas its interaction with financial development remains insignificant across the three fiscal equations. Institutional quality and its interaction with financial development also lack statistically significant effects. Foreign direct investment growth is associated with stronger revenue and fiscal balance, while aid growth and public debt growth are associated with fiscal deterioration. Natural resource rents support revenue, although their estimated contribution to fiscal balance does not remain significant over the longer horizon. These findings indicate that stronger financial systems can expand fiscal capacity without necessarily producing fiscal consolidation. Their policy value depends on how additional revenue and borrowing opportunities are translated into expenditure decisions. Financial reform should consequently be coordinated with debt management, credible expenditure oversight, and stronger connections between financial intermediation and productive activity. The estimates support these conditional conclusions but do not establish the underlying transmission mechanisms directly.