3.1 Are all states fiscal states?

There is implicit disagreement in the literature concerning whether all contemporary states can be categorized as fiscal states. One group of scholars either explicitly or implicitly assume that all modern states are fiscal states because they have the ability to raise revenue. Differences among them become a matter of how states use their fiscal tools to meet public policy goals such as adjusting market failure or designing welfare policies (Buchanan and Musgrave, Reference Buchanan and Musgrave2001; Jensen, Reference Jensen2011; Musgrave, Reference Musgrave1996). Such differences between states are taken as expressions of, for example, variations (Musgrave, Reference Musgrave1996) or advancements (Jensen, Reference Jensen2011) of fiscal states. Seen through this lens, all states in SSA would be considered fiscal states.

Other scholars, such as Yun-Casalilla (Reference Yun-Casalilla, Yun-Casalilla, O'Brien and Comin2012: 1), reserve the term ‘fiscal state’ for ‘nations and democratic states as they emerged over the nineteenth century’. Moreover, and relevant for exactly contemporary states, Yun-Casalilla distinguishes the fiscal state from the rentier state by whether they penetrate society to earn income (Ibid: 5). Over time, many scholars have analysed the rentier state as a distinctive state type defined by its dependence on rents from extractive natural resources or donors (e.g. Beblawi, Reference Beblawi, Belawi and Luciani1987; Chaudry, Reference Chaudry1989; Mahdavy, Reference Mahdavy and Cook1970; Moore, Reference Moore2004; Ross, Reference Ross, Lancaster and van de Walle2016; Sachs and Warner, Reference Sachs, Warner, Meier and Rauch2000). Interestingly, the literature review showed little overlap between references to fiscal states and rentier states, which implies that the two literatures are siloed. The conceptual relation between fiscal and rentier states has thus received limited attention. However, it is clear that rentier states and fiscal states represent contrasting examples of state development functioning. Rentier states are often characterized by their ‘pathologies’ (Moore, Reference Moore2004), meaning that dependence on particularly oil rents tends to have a series of negative effects on the economy and society. In contrast, fiscal states often involve positive connotations because the diverse revenue base is perceived to have several beneficial effects on the economy and society. Hence, the existence of the concept of rentier state and its widespread application on empirical cases such as Nigeria (Lewis, Reference Lewis2007) or Angola (Hammond, Reference Hammond2011) demonstrates the empirical relevance of this state type. Consequently, the contrasting foundation and empirical relevance of the rentier state ideal type indicates that not all states are fiscal states.

The question concerning the extension of the fiscal state is, of course, closely linked to its conceptual intension. The following three sections are structured around questions that arose from the literature review and that represent dimensions on which the defining attributes of the fiscal state concept vary, sometimes explicitly but often implicitly.

3.2 Is capacity a defining attribute of fiscal states?

The first question concerns whether capacity (administrative, state, or fiscal) is explicitly included as a defining attribute of fiscal states. Many see state capacity as a core attribute of the fiscal state: Boucoyannis (Reference Boucoyannis2015: 304) argues that state capacity allowed for the imposition of taxation, and Dincecco and Katz (Reference Dincecco and Katz2014) describe state capacity as states' ability to extract taxation. Cardoso and Lains (Reference Cardoso and Lains2010: 5) associate the rise of the fiscal state with ‘an increase in the ability of centralized states to manage the administrative apparatus for raising taxes, as well as with the ability of the sophisticated financial institutions to manage public debt’. Yet, many other sources do not mention state capacity explicitly as they discuss fiscal states (Musgrave, Reference Musgrave1996; Omeje, Reference Omeje2016; Sandbakken, Reference Sandbakken2006; Zhang, Reference Zhang2017).

Tightly linked to state capacity is fiscal capacity, which potentially adds another layer to the complexity. Fiscal capacity and fiscal states are sometimes used in conjunction and interchangeably, but only few papers mention both fiscal state and fiscal capacity. For example, the recent paper by Albers et al. (Reference Albers, Jerven and Suesse2020) is titled ‘The fiscal state in Africa’, but it only mentions and defines fiscal capacity. Therefore, it is difficult to determine if fiscal capacity is seen as a defining attribute of fiscal states or rather as a precondition or effect of its presence. Interestingly, the literature on fiscal capacity yields three times as many hits in Web of Science and one and a half times as many hits in Scopus. One likely reason is that while fiscal state and fiscal capacity might share core denotations, the latter seems to be more easily approached and measured if taken by the number of quantitative studies on fiscal capacity (e.g. Cárdenas, Reference Cárdenas2010; D'Arcy and Nistotskaya, Reference D'Arcy and Nistotskaya2018; Dincecco and Prado, Reference Dincecco and Prado2012; Jensen, Reference Jensen2011).

Fiscal states and fiscal capacity arguably carry different meanings and attributes because they represent two distinct analytical levels: one characterizes a type of state; the other characterizes attributes of a state. Meanwhile, fiscal capacity warrants its own discussion, and two curiosities are of relevance here. First, fiscal capacity is almost exclusively used in reference to states' ability to tax (e.g. Cárdenas, Reference Cárdenas2010; D'Arcy and Nistotskaya, Reference D'Arcy and Nistotskaya2018; Ricciuti et al., Reference Ricciuti, Savoia and Sen2018; one important exception being Frankema and Booth, Reference Frankema, Booth, Frankema and Booth2020). Connotations of the term fiscal capacity simply imply having capacity to ensure government revenue. Therefore, it would make more sense to talk of types of fiscal capacity such as tax capacity, which would refer to the ability to tax, borrowing capacity, as the ability to borrow, and rents capacity, as the ability to extract rents including from extractive natural resources. Such disaggregation is relevant because studies that use fiscal capacity but refer to, and measure it by, states' ability to collect taxes could simply opt for tax capacity (e.g. Baskaran and Bigsten, Reference Baskaran and Bigsten2013; Dincecco et al., Reference Dincecco, Fenske and Onorato2019; Dincecco and Prado, Reference Dincecco and Prado2012; Jensen, Reference Jensen2011).Footnote ² Likewise, Ricciuti et al. (Reference Ricciuti, Savoia and Sen2018) argue that tax ability is just one dimension of fiscal capacity (the other dimension in their argument is impartiality). Second, researchers of fiscal capacity often focus on direct taxes. Even though direct taxes have traditionally been perceived as the most developed form of state income (e.g. Kaldor, Reference Kaldor1963), it is debatable whether direct taxes are a central enough tax source in today's developing states for them to be a relevant indicator of fiscal capacity (Bird and Zolt, Reference Bird and Zolt2005). This concern is also relevant for the conceptualization of the fiscal state; a narrow focus on this ‘modern tax’ (Genschel and Seelkopf, Reference Genschel and Seelkopf2021) can be problematic. The tax landscape in Africa obviously looks different than when the European fiscal state emerged. Direct taxation cannot be assumed to be broad-based in an African context and, hence, this tax type might entail very different qualities and implications. To the extent that fiscal capacity denotes the ability to tax, one risks neglecting the important conceptual distinction between the tax state and the fiscal state and the progression in sources of revenue that differentiate the two.

3.3 What are the revenue sources of fiscal states?

A second key question that arises concerns revenue sources. There seems to be consensus that fiscal states are financed through taxes and borrowing, but the relative weight given to these revenue sources differs in the literature.

Most scholars mainly associate the fiscal state with the ability to tax (Albers et al., Reference Albers, Jerven and Suesse2020; Cardoso and Lains, Reference Cardoso and Lains2010; Dincecco and Prado, Reference Dincecco and Prado2012; He, Reference He2013; Yun-Casalilla et al., Reference Yun-Casalilla, O'Brien and Comin2012), but few define the characteristics of taxation further. Thus, He (Reference He2013) emphasizes the centralized nature of tax collection, while O'Brien (Reference O'Brien2005: 30–31) implies that moving from direct taxes (such as land taxes) to easier-to-collect indirect taxes made Britain the most effective fiscal state in Europe at the time.

There is little discussion of how dependent a state needs to be on taxation vis-à-vis other revenue sources for it to qualify as a fiscal state. To the extent that this remains un(der)specified, there is a risk of conceptual overlap between the tax state and the fiscal state. Meanwhile, most scholars do mention that fiscal states – in addition to being able to tax – have the ability to issue paper money or borrow (e.g. Bonney, Reference Bonney1999; Cardoso and Lains, Reference Cardoso and Lains2010; He Reference He2013; Moore, Reference Moore2004; Piano and Salter, Reference Piano and Salter2021). While issuing paper money was a central part of early state-building, many contemporary states are not monetarily sovereign; their currencies are not in demand, they are indebted in foreign currencies, they are part of monetary unions, and they face global pressure not to conduct monetary policy (Gevorkyan and Kvangraven, Reference Gevorkyan and Kvangraven2016; Smith, Reference Smith2021; Sylla, Reference Sylla2020). Hence, monetary policy is not included in the definition here.

As for borrowing, the rise of the fiscal state is attributed to when it became possible to secure (mainly commercial) loans (Bonney, Reference Bonney and Bonney1995). This allowed the state to achieve ‘an economy of scale in mobilizing financial resources’ in the long term (He, Reference He2013: 5) and gave it ‘superior capacity … to raise the financial resources to cope with emergencies’ (Moore, Reference Moore2004: 301). Emergencies, most notably wars (e.g. Dincecco and Prado, Reference Dincecco and Prado2012), meant that tax revenues were insufficient and prompted rulers to borrow. Borrowing was the outcome of taxation in that states' fiscal systems provided the basis for credible commitment to lenders who gave significant loans on the basis of future tax revenues. As Bonney argues, fiscal states' powers were to be made up by ‘the capacity of governments to borrow, and the interaction between the constraints on borrowing and the power to tax’ (Reference Bonney and Bonney1995: 505).

Curiously, while borrowing is undisputedly a defining attribute of fiscal states, as highlighted above, empirical research on contemporary fiscal states mainly tends to focus on tax collection (Albers et al., Reference Albers, Jerven and Suesse2020; Beramendi et al., Reference Beramendi, Dincecco and Rogers2019; Besley, Reference Besley2020; Moore, Reference Moore2021). The reason might be that in today's complex economies, borrowing can be obtained through many other foundations than expectations about future tax revenue, for example, through expectations to states' growth potential or through natural resource collateralization (AFDB, 2021; Mihalyi et al., Reference Mihalyi, Adam and Hwang2020; Smith, Reference Smith2021). It might be that the ability to borrow is taken for granted in today's global economies. Hence, the literature instead (over)emphasizes the importance of taxation in the state economy. Importantly, this seems to reflect the fact that debt and taxes have often been presented as substitutes, i.e. if a state lacks tax revenue, for example in times of crisis, it can instead borrow money to cover expenses. Yet, this understanding de-emphasizes the important interplay between the two revenue sources. We argue that a key feature of the fiscal state is exactly that taxes and borrowing are complementary rather than substitutes. For example, the soundness of the tax base will influence the ability to gain favourable loans. This complementary interdependence between taxes and debt is part of what makes the fiscal state more sustainable than other state types. We will return to this point later.

3.4 Do fiscal states need to spend in certain ways?

A final significant question concerns whether fiscal states are defined solely by their sources of revenue or the character of the states' expenditure is also a defining attribute. The scholarly contributions analysed in the above do not address this question explicitly. Some contributions include the composition of public expenditure as part of the definition of a fiscal state whereas many other contributions do not. What is clear, therefore, is that there is significant unclarity in the literature.

Scholars who include the expenditure side in their understanding of the fiscal state consider whether domestic revenues are used to finance a government's policy objectives or publicly negotiated common goods, including redistributive purposes (Bird and Zolt, Reference Bird and Zolt2015; Buchanan and Musgrave, Reference Buchanan and Musgrave2001; Cardoso and Lains, Reference Cardoso and Lains2010; Martin et al., Reference Martin, Mehrotra, Prasad, Prasad, Mehrotra and Martin2009). They, for example, connect the rise of fiscal states to the emergence of democratic rule, modern state bureaucracy, and the first signs of public services beyond protection of citizens (Buchanan and Musgrave, Reference Buchanan and Musgrave2001; Mehrotra, Reference Mehrotra2013; Yun-Casalilla, Reference Yun-Casalilla, Yun-Casalilla, O'Brien and Comin2012).

Musgrave (Reference Musgrave1996) distinguishes between four types of fiscal states according to the structure of states' expenditure. His point of departure is public finance and the argument that fiscal states need to be categorized according to whose needs the state accommodates and the extent to which the state redistributes and meets market flaws. This is very different from other branches of the literature reviewed that mainly focus on the state's revenue side. For instance, Albers et al. (Reference Albers, Jerven and Suesse2020) are clearly interested in discerning whether fiscal states are emerging in sub-Saharan Africa based on long term analysis of whether domestic revenues are increasing.

Arguably, it is difficult, if not impossible, to include both the revenue source dimension and an expenditure side in the definition of a fiscal state while maintaining the ambition to develop an analytically useful concept. Including the expenditure side complicates the concept and empirical identification. And, more importantly, as will be theorized below, rather than constituting a defining attribute of the fiscal state, a contractual relationship between state and individuals is part of the feedback mechanisms that can reinforce and maintain the fiscal state. To illustrate, if a present-day fiscal state invests in increasing productivity on a long-term basis, this can strengthen the state's ability to tax and borrow in the future. On the other hand, unwise investment decisions might negatively affect future revenue sources. Assuming that the revenue sources and their composition then change, the state may enter into negative dynamics that will undermine its fiscality and make it fall out of the category of a fiscal state. Timmons (Reference Timmons2005) is but one contribution showing how state expenditure is explained by the composition of revenues pointing to e.g. how a high share of property tax in the USA incentivizes the government to spend a lot on private property protection. Steinmo (Reference Steinmo1993) shows how variations in welfare states can be explained by types of tax systems. These contributions need to analytically separate public expenditure policies from revenue sources since the latter explains the former. In addition, it is possible for a state to have an advanced system of social services without being a fiscal state, as is the case with some rentier states. Looking at the types of, say, social expenditure alone in these states would not necessarily capture the rentier state dynamics behind them. Likewise, debt states might use debt to finance growth-enhancing investments (i.e. expenditures), which in the future may lead to a change in the revenue source composition and, thus, in financial state type. We return to this point when presenting our typology and debating the sustainability of the different state types in section 4.2. Consequently, we argue that expenditure is not part of the fiscal state definition but instead influence its ability to persist in the future.

If the output side of public finances is included, the conceptual intension increases, extension decreases, and, importantly, conceptual complexity (and confusion) grows. In sum, the blurriness of the fiscal state concept inhibits a proper understanding of the implications of the fiscal state.

3.5 Summing up

Based on the literature review and the four conceptual questions that arose from it, we can make several observations. (1) While some contributions seem to assume that all contemporary states are fiscal states, there are grounds for arguing that this is not necessarily the case. (2) When considering how to define a fiscal state, attributes such as state capacity and fiscal capacity are important features. However, both are elusive concepts themselves and therefore not beneficial in an analytically applicable definition. (3) Though some scholars will analyse fiscality of a state by its ability to tax, other revenue sources are important to include, especially borrowing. (4) Lastly, many define fiscal states by the expenditure side or its link to revenue. Meanwhile, by including this in the definition, we risk confusing defining attributes with effects thereof.

Based on these conclusions, a definition of a fiscal state should enhance parsimony and clearly differentiate the concept's defining attributes from its causes and consequences (Gerring, Reference Gerring1999; Hodgson, Reference Hodgson2019). This implies that (1) the concept should not include the size and composition of public expenditure, which can instead be explained by the nature of a fiscal state; (2) it should be clearly distinguishable from other effects such as welfare, governance, and inequality; and (3) it should be distinguishable from its preconditions, such as the level of commercialization of the economy. While conceptual parsimony imposes limits on the depth of the concept, it increases its theoretical and field utility. In addition to parsimony and differentiation from causes and consequences, we seek familiarity and resonance (Gerring, Reference Gerring1999) by maintaining the core defining attributes identified above. We find that only a definition based solely on the characteristics of state revenue can accommodate these criteria. The remainder of the article will present and discuss the chosen definition, its key components, and illustrate the conceptual delimitations with empirical examples.

4.1 A balance between taxation and borrowing

Most states today can tax and borrow, but we argue that the presence of a balance is what sets fiscal states apart from other states that depend exceedingly on loans, state monopolies, or natural resource extraction. Such a balance renders fiscal states more resistant to economic crises and shocks. Yet, the two revenue sources are not necessarily intimately linked. The loan market is diverse and consists of many different political and commercial interests. China, for example, lends money to lower-income countries in Africa as a part of political deals without necessarily considering their tax base (Bräutigam, Reference Bräutigam2020; McCormick, Reference McCormick2008).Footnote ³ This detachment between taxation and borrowing is not a new phenomenon. Frankema and Booth's (Reference Frankema, Booth, Frankema and Booth2020) observations of colonial states can be paralleled to contemporary states. They emphasize that decisions to take loans were not based primarily on risk assessments by private investors (or indeed only on tax capacity in the colonies) but rather on the decisions of officials of the metropole weighing the cost of development projects in the colony against the risks of default (Ibid.: 12). This was one reason for the lack of fiscal modernization of the colonial state and, conversely, an argument for why a balance and interdependence between taxation and borrowing is important.

To assess the balance between tax and debt, one must include the terms on which a state borrows. Borrowing is a means to stabilize an economy. It can be used to finance short-term measures of crisis management when tax revenue momentarily drops, or to support long-term growth-enhancing investment policies (AFDB, 2021; Dincecco and Prado, Reference Dincecco and Prado2012; Moore, Reference Moore2004; Smith, Reference Smith2021: 99–101). Most recently, however, debt has in many countries led to what IMF describes as fiscal stress rather than economic stability during the COVID-19 pandemic (AFDB, 2021; Smith, Reference Smith2021: 101–02). Importantly, whether debt has negative effects on fiscal sustainability does not necessarily depend on the size of a country's debt (Chandler, Reference Chandler2020). Instead, the conditions surrounding its debt such as the maturity of the loan, the interest rate, and the currency in which the loan is taken are determinants of a country's ability to service and repay debt obligations (Smith, Reference Smith2021: 91). Most often, borrowing based on stable tax revenue rather than growth potential or natural resource collateralization can ensure better and more stable loan conditions. This is because borrowing based on natural resource rents or growth potential renders the state more vulnerable. For example, if the prices of natural resources drop, if debt-financed project fails to generate predicted returns, or if the global market starts retracting such as during the financial crisis or the COVID-19 pandemic, this can limit borrowing opportunities or increase interest rates. The more tax revenue the government can collect now and in the future, the better its means for servicing debt, which in turn is likely to reduce the cost of borrowing. A balanced composition between tax and debt thus provides for better loan conditions and sustainability and makes fiscal states more resistant to crises.

We emphasize that fiscal states are characterized by a revenue composition dominated by a balance of taxation and borrowing because this alerts researchers to the importance of sustainability. Admittedly, including sustainability in the fiscal state concept risks adding to its elusiveness. However, we contend that sustainability applied in its most basic meaning is in fact fairly intuitive (Merriam-Webster, 2022). The relationship between taxation and borrowing is sustainable when it is maintained at length without interruption or weakening and when neither of the revenue sources are depleted or permanently damaged through its use. To assess sustainability, analyses need to be contextual, including both national and international factors, and they must also include a time dimension. One example of such an assessment is IMF's debt sustainability framework, which includes various dimensions of domestic capacity such as institutions and the tax base. Importantly, such an assessment acknowledges the deep-rooted variations in debt sustainability between countries at different levels of economic development (IMF, 2013, 2018; Smith, Reference Smith2021: 96–97). Accordingly, this also implies that economic growth would be a poor indicator when assessing fiscal sustainability because it does say much about the underlying conditions of fiscal sustainability including the breadth and diversity of the tax base (for a discussion of preconditions of the fiscal state, see Bak et al., Reference Bak, Jeppesen and Kjær2021). Hence, we would risk mischaracterizing states where growth is driven by, for example, large external rents or extensive borrowing, as we elaborate below.

4.2 Typology of ideal state types

According to the presented definition, not all states are fiscal states. This is consistent with the existence of other state types emerging from the literature review, such as the rentier state. In terms of the dominance of and balance between revenue sources, a rentier state exhibits a different structural basis than fiscal states. Hence, we argue that fiscal states and, for example, rentier states are distinct (ideal) state types rather than variations within a group. To illustrate, we have developed a state typology to demarcate the fiscal state from other ideal state types. Figure 2 operates with continuums in a coordinate system and thus emphasizes the dynamic room for state transitions as well as the grey zones between the ideal types.

Figure 2. Distinguishing between ideal state types defined by their revenue side.

Note: The dotted lines are included as figurative indications. The line without an arrow exemplifies when taxes and borrowing become dominant. The line with an arrow exemplifies when a balance is achieved between taxes and borrowing.

Source: Authors' construction.

Other typologies map states according to their revenues. Bonney and Ormrod (Reference Bonney, Ormrod, Ormrod, Bonney and Bonney1999), for example, have a helpful model of fiscal systems. However, our typology distinguishes itself in two ways. First, where Bonney and Ormrod's model explains historic fiscal systems, the present typology has the potential to understand contemporary states. Second, the Bonney-Ormrod model tends towards presenting a somewhat linear view of state development, not least given the inescapable historical empirical basis of their model. In contrast, our typology presents a dynamic perspective as it allows for states to move between the depicted ideal types.

As defined above, (1) fiscal states' revenue base is dominated by taxes and loans with a balance and interdependence between taxation and domestic and external borrowing. Thus, fiscal states exhibit relatively complex state financing. This differs from (2) tax states that have a relatively simple public economy primarily financed through taxes, and (3) debt states that might have some tax collection but predominantly rely on state revenue from borrowing, which is not necessarily linked to expected future tax revenue. Lastly, (4) rentier states neither tax nor borrow much but attain their main financing from aid or natural resource extraction. A last group of states could be termed non-fiscal in the sense that they have very limited state resources, such as fragile states experiencing long-term conflict. In Figure 2, these states would be placed with the rentier state but with a fundamentally different political economy and much less room for transitioning towards becoming a fiscal state. As these are ideal state types, real-world states typically lie in the grey zones between them. For this reason, we stress the importance of identifying the dominant revenue source(s) when determining empirically whether a state can be deemed a fiscal state. Consequently, if a state's finances are dominated solely by either tax revenue, aid or natural resources, or debt, the state does not classify as a fiscal state.

Though we define the ideal types along a revenue source dimension, we theorize that states can evolve and move between these ideal types as a result of changes in the composition of revenue sources – that is, the balance and dominance of revenue(s), as well as changes in expenditure demands. Changes in state expenditure can influence revenue composition through several feedback mechanisms: for example, if debt service expenditure becomes too high; if public investments in a sector contribute to sector growth and, in turn, more sectoral taxation; or, as indicated in fiscal contract theories (e.g. Levi, Reference Levi1988), if more spending increases quasi-voluntary compliance and, in this way, eases and increases tax collection. Hence, while the input side of revenue and the output side of spending are theoretically and empirically distinct, the output side manifesting the level of quid pro quo can help improve, sustain, or undermine the input side (Moore, Reference Moore2004, Reference Moore2021; O'Brien and Hunt, Reference O'Brien and Hunt2007; Prichard, Reference Prichard2015). While states can potentially move, for example, towards becoming fiscal states, they tend to be caught in the status quo as their main sources of revenue are likely to be self-reinforcing.

The rentier state receives rents primarily from foreign actors; they accrue directly to the state, and ‘only a few are engaged in the generation of this rent (wealth), the majority being only involved in the distribution or utilization of it’ (Beblawi, Reference Beblawi, Belawi and Luciani1987: 50). In many countries, the reliance on rents has demotivated productive investment in the broader economy and limited economic diversification (e.g. Beblawi, Reference Beblawi, Belawi and Luciani1987; Karl, Reference Karl1997; Ross, Reference Ross, Lancaster and van de Walle2016; Savoia and Sen, Reference Savoia and Sen2021). Reliance on rents will tend to be self-reinforcing; as the large amounts of ‘unearned income’ provides little incentive to invest in economic diversification, which implies that the composition of revenue comprising a heavy reliance on rents is maintained, if not exacerbated in the future (Ross, Reference Ross, Lancaster and van de Walle2016). To illustrate, Nigeria gets close to an ‘archetypal oil nation’ and, thus, rentier state (Watts, Reference Watts2004: 50). More than 95 per cent of foreign exchange earnings derive from petroleum exports, and oil revenues constitute 65–80 per cent of government revenues (depending on data source and time of assessment) (Fagbemi and Adeoye, Reference Fagbemi and Adeoye2020; Hailu and Kipgen, Reference Hailu and Kipgen2017). Nigeria's ‘rentier state’ characteristics have been self-reinforcing, and moreover, there is a broad consensus that its oil dependence has led to governance challenges including large-scale corruption, a lack of diversification of production, and other features of the so-called ‘resource curse’ (Auty, Reference Auty1993; Lewis, Reference Lewis2007). However, this does not mean that Nigeria could not move towards other state ideal types. Its dependence on oil can make its indebtedness larger in times when oil prices are low, which could push it towards becoming a debt state. Alternatively, political decisions to make productive investments beyond the oil sector (i.e. its expenditure decisions) could lead to gradual diversification of the economy. Such interventions would likely serve to diversify the revenue base in the longer run, which would improve the balance between different revenue sources and increase its fiscal sustainability. In other words, there is no deterministic relation between extractive natural resources and their negative effects. The relation is mediated by political and institutional variables (Lewis, Reference Lewis2007; Rosser, Reference Rosser2006).Footnote ⁴

Debt states tend to be caught in a trap of accumulating debt as one loan leads to another to pay off earlier ones. Meanwhile, it becomes continuously difficult to meet recurring expenditures and the spending demands that caused the loans in the first place. This can potentially lead to debt overhang or the need for debt relief. While a state's revenues are highly unlikely to consist only of loans, loans can be a dominant source of state financing which is obtained, for example, based on debt collateralization, such as commodity-secured loans, or growth potential (AFDB, 2021: 4–5, 64–65; Mihalyi et al., Reference Mihalyi, Adam and Hwang2020; Smith, Reference Smith2021: 116). This makes debt states vulnerable to drops in commodity prices, changes in global liquidity, credit ratings, or significant increases in borrowing costs and loan conditionalities (e.g. Gevorkyan and Kvangraven, Reference Gevorkyan and Kvangraven2016). To illustrate, while Zambia is highly dependent on its copper industry and collects various types of taxes, it has moved towards becoming a debt state. Zambia's debt load became increasingly unsustainable during the 2010s as a result of ‘reckless’ over-borrowing, a depreciation of the Zambian currency, and borrowing for consumption instead of investments (Smith, Reference Smith2021: 87–88, 143–145; ZIPAR, 2018). If cobber prices had not decreased in the period or borrowing had been used differently, the Zambian economy might have evolved more positively. Yet, this highlights the vulnerability of relying heavily on fluctuating resource rents and unbalanced debt, thus demonstrating the lack of sustainability in Zambia's financing. Consequently, Zambia became the first African country to default on its Eurobond loans in 2020 (Bräutigam, Reference Bräutigam2021; Smith, Reference Smith2021: 116). Today, Zambia's debt makes up more than 100 per cent of its GDP (Benson, Reference Benson2022; Smith, Reference Smith2021: 88). This accumulation of debt occurred despite significant debt relief and cancellations throughout the 2000s, although it could be argued that this history of debt cancellation also led to moral hazard risk when obtaining new loans (Bräutigam, Reference Bräutigam2021). Zambia's movement towards becoming a debt state highlights how debt accumulation tends to be actor-driven. For example, the Zambian parliament agreed to raise the ceiling on external borrowing, and the Zambian government ignored warnings from IMF in the mid-2010s (Smith, Reference Smith2021: 160; ZIPAR, 2018).

The least stable of the four types is the tax state. As taxation increases, so does demand for expenditure, and an established infrastructure for taxation provides a basis for beneficial borrowing, which is likely to set off a movement towards becoming a fiscal state. Accordingly, the tax state seems to have status as a historical rather than a contemporary phenomenon (He, Reference He2013). Evolving from a tax state to a debt or a fiscal state is obviously conditioned by the nature of economic transformation as well as the extent of access to the lending market. Access to loans is based on the state's ability to make credible commitments to loan providers due to an expanded and diversified economy. In addition, serious economic crises or conflicts could undermine taxation, either diminishing state finances altogether or necessitating loan-taking, which could push the country towards a status as a non-fiscal or debt state.

The fiscal state ideal type is the most stable of the four types due to its reliance on a balance of and interdependence between taxes and loans. The balance allows it to acquire loans on good terms based on its assurance in tax revenue, and tax revenue remains relatively stable because favourable loans help ensure a stable economy even in times of crisis. The balance and interrelation thus imply that the state's public finances are more sustainable and stable, and for this reason fiscal states are likely to be conducive to long-term economic development. As the revenue side reinforces a positive nexus, only few situations, such as unsustainably high expenditures, can lead them off track. To illustrate, Senegal would be much closer to the fiscal state ideal type than Nigeria or Zambia. Senegal's tax-to-GDP level is about 16–18 per cent; just at or above the Sub-Saharan African average (Bak, Reference Bak2019; Niang and Mbaye, Reference Niang and Mbaye2020; UNU-WIDER, 2021). A considerable proportion of Senegal's tax revenue is personal or corporate income tax (30 per cent), while VAT constitutes around 40 per cent. Senegal's revenues from natural resources or aid are not significant. Non-tax revenues thus consisted of 1 per cent of GDP. The domestic revenue take has allowed Senegal to maintain considerable debt levels, which were projected to peak at 68 per cent of GDP in 2022 (IMF, 2021). However, due to the COVID-19 crisis and the effects of the war in Ukraine, debt levels are now expected to reach 75 per cent (IMF, 2022), and Senegal's debt has been assessed by international financial institutions to be sustainable with a moderate risk of over-indebtedness and limited ability to absorb shocks (IMF, 2022). Compared to Nigeria and Zambia, Senegal was moving towards becoming a fiscal state; however, the balance between taxation and borrowing seems to be tipping, as in many other countries, during the COVID-19 crisis. While Senegal's per capita GDP growth has only been slightly higher than that of Zambia or Nigeria, Senegal's tax base is more diverse, and its reliance on taxes relative to rents is higher. Thus, Senegal's case shows that it is not economic growth per se that could make a fiscal state but the potential for fiscal sustainability that build on the level of diversification of the economy (Bak et al., Reference Bak, Jeppesen and Kjær2021).

In sum, we argue that a fiscal state is defined and identified by its input side. In practice, data on taxation (excluding natural resources revenue) and loans are the main indicators to use, but actually assessing the balance requires a qualitative assessment. Furthermore, it is imperative to take both conditions of revenue acquisition and factors on the expenditure side into consideration as these can improve, sustain, or undermine the revenue input. An extensive assessment is beyond the scope of this paper. Instead, we discuss the implications of our fiscal state definition and typology for understandings of fiscality and (ideal) state types.