The role of tax revenue and public spending in promoting export growth: Evidence from Cambodia

Abstract

This study investigated the dynamic effects of fiscal and macroeconomic variables on Cambodia’s export performance using a Vector Autoregressive (VAR) model, which included the analysis of Forecast Error Variance Decomposition (FEVD) and Impulse Response Functions (IRFs). The FEVD results revealed that while export growth was initially explained entirely by its own shocks, the influence of external variables increased over time. By the fifth forecast horizon, exports accounted for only 71.68% of their own variation, with government expenditure emerging as a significant contributor (16.26%) and maintaining a stable impact of around 16.5% through period 10. Exchange rate fluctuations accounted for approximately 8.03% of the forecast variance, while tax revenue and inflation contributed modestly, at 4.36% and 1%, respectively. The IRF analysis confirmed these findings, showing a strong and immediate response of exports to government spending shocks, especially in the early periods. In contrast, the responses to shocks in tax revenue, inflation, and exchange rates were relatively weak and statistically insignificant. These results underscore the pivotal role of productive public spending, particularly infrastructure investment, in driving export growth. Meanwhile, tax policy, inflation control, and exchange rate stability appear to play more secondary or indirect roles. The findings offer valuable insights for designing export-supportive fiscal and macroeconomic policies in Cambodia.