Not all government revenues grow at the same rate as the economy. Some increase relatively steadily, while others react much more strongly to changes in economic activity. This sensitivity has a name in public economics: fiscal elasticity.

 

It measures how government revenue changes when gross domestic product changes. An elasticity greater than 1 means that revenue increases faster than growth. Conversely, an elasticity less than 1 indicates that it grows more slowly than economic activity. This distinction is crucial for understanding why public finances can improve rapidly during periods of expansion and then deteriorate just as quickly.

 

VAT is a particularly good example of this mechanism. Because it is directly linked to consumption, it reacts almost immediately to changes in economic activity. When households spend more and businesses sell more, VAT revenues increase rapidly. Conversely, an economic slowdown results in an almost automatic contraction of these revenues.

 

The French example illustrates the extent of this sensitivity. In 2021, VAT revenues increased by approximately 15%, while GDP growth reached nearly 6.8%. This difference demonstrates how certain tax revenues can amplify movements in the real economy.

 

Senegal also exhibits comparable trends, albeit more gradual. Between 2020 and 2022, the ratio of tax revenue to GDP rose from approximately 16.8% to nearly 19.8%. This increase is not solely attributable to tax reforms, but also to the rebound in economic activity and consumption following the slowdown caused by the pandemic.

 

The structure of revenue plays a decisive role here. In Senegal, indirect taxes, particularly VAT, represent a dominant share of tax resources, around 70% according to World Bank data.

This means that public finances remain highly sensitive to changes in domestic demand and imports. When economic activity picks up, revenues rise rapidly. But when consumption slows or imports fall, the trend reverses just as quickly.

 

This elasticity can give a misleading impression of fiscal strength. A rapid increase in revenue during a favorable period can be interpreted as a structural improvement, when in fact it remains partly cyclical. Conversely, a sharp decline during a slowdown can be surprising if this sensitivity is not anticipated.

 

For public decision-makers, the challenge is therefore to integrate this volatility into budgetary management. Understanding which revenues react strongly to growth helps avoid overly optimistic forecasts and better prepare for periods of economic downturn.