Fiscal impact of privatization revisited: The role of tax revenues in transition economies

•The paper estimates a panel of 29 transition countries over 20 years for budget balances and tax revenue data.•It analyzes the effect of privatization on budget balances and tax revenue.•The paper finds robust signs of a negative relationship between privatization and the budget balance. Also a heavy loss of revenue appears to be associated with the privatization process.•A substantial part of the later recovery in tax revenue can be attributed to the adoption of VAT taxes.

In contrast to earlier literature, this paper finds empirical evidence that privatization has deteriorated fiscal balances in transition economies. The investigation focuses on the role of tax revenues in explaining the fiscal impact of privatization, as it appears that tax revenue in many transition countries remained lackluster even after the adoption of several tax reforms in the last two decades, and no formal econometric assessment has been conducted of the extent to which privatization has affected tax revenues. Using panel data for 29 Eastern European and former Soviet Union countries, the analysis finds robust signs of a strong negative impact of privatization on different tax revenue sources. The paper also provides some empirical evidence favoring the early adoption of value-added taxes that appear to have contributed to government revenue recovery.