Abstract/Summary

Fiscal disequilibrium arises when permanent expenditures (PEXP) exceed permanent revenue (PREV), a frequent risk in energy-exporting economies reliant on volatile windfall revenues. However, existing research lacks a clear measure of these concepts and an empirical test for fiscal equilibrium. We address these gaps by developing a novel measure of PREV—combining non-energy revenue with trend energy revenue—and integrating it into a cointegration-based test for fiscal equilibrium. Applying this framework to Trinidad and Tobago (T&T), a small, open, energy-exporting economy, we establish its effectiveness and demonstrate its broader applicability to similar economies. The results confirm weak-form fiscal equilibrium, with an adjustment parameter below one, and remain robust across specifications and structural breaks. We further investigate asymmetries in the permanent budgetary components using a non-linear autoregressive distributed lag (NARDL) analysis, which confirms asymmetry in both the short and long-run. Specifically, while a positive long-run relationship exists between PREV and PEXP, short-run responses vary due to pre-defined budgetary allocations and time lags. To progress toward strong-form fiscal equilibrium, we recommend gradually decoupling PEXP from energy revenues, strengthening institutional frameworks, and reallocating resources toward economic diversification. We also propose an energy revenue deviation rule to guide fiscal adjustments and mitigate budgetary imbalances.