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Purpose: The present research aims at identifying the latent factors that are driving the rise of the shadow economy in Palestine, assesses its magnitude from 1998 to 2021 and investigates the influence that its size has on the financial sustainability of Palestine's public budget. Design/methodology/approach: The researchers employed the multi-indicator multi-causes (MIMIC) model to estimate the size of the shadow economy and investigate its effect on the financial sustainability of the public budget. Economic factors such as direct taxes, indirect taxes, government welfare, government spending and unemployment were considered causal variables, while indicators of financial sustainability included budget deficit, public debt and gross domestic product (GDP). The shadow economy served as an intermediary variable. Findings: Based on the findings, the researchers recommend regulating and formalizing legitimate activities within the shadow economy. Additionally, they suggest promoting investment projects to reduce unemployment rates, lowering taxes on essential goods and consumer items and providing support to local producers in Palestine. These measures aim at addressing the challenges posed by the shadow economy and fostering economic stability. Originality/value: The study reveals that the average size of the shadow economy in Palestine between 1998 and 2021 was 43.80%, fluctuating within the range of 39.92%–46.30%. It further establishes that an increase in direct and indirect taxes as well as unemployment contributes to the expansion of the shadow economy. Conversely, government welfare and spending exert a diminishing effect. Moreover, the study finds that the rise of the shadow economy correlates with an increase in public debt, budget deficit and GDP, indicating a negative impact on the financial sustainability of the public budget. [ABSTRACT FROM AUTHOR]

Purpose: The purpose of this paper is to explore the link between corruption and government debt through a regime-based approach. Design/methodology/approach: The empirical analysis makes use of a panel of 120 countries, spanning the period 1999–2015. The study makes use of the Panel Smooth Transition Regression (PSTR) methodological approach, as well as two alternative measures of corruption. Findings: The empirical results document that the relationship between corruption and debt is non-linear, while a strong threshold effect was present as well. Public debt appears to respond faster to a high corruption regime compared to a low corruption regime, while an increase in the size of the shadow economy, government expenses, the inflation rate, interest payments on debt and military expenditure all increased the debt to GDP ratio. By contrast, an increase in GDP per capita, the secondary school enrollment ratio and the ratio of tax revenues to GDP led to a fall in the debt to GDP ratio. The findings survive certain robust checks when the role of the 2008 financial crisis is explicitly considered, as well as when two separate country samples were considered, i.e. developed vs developing countries. Practical implications: Governments should aim to control both corruption and the size of the shadow economy if they really wish to reduce any high levels of their public debt. As debt levels respond faster to high corruption regimes, it is necessary that measures to reduce corruption are complemented by higher GDP per capita growth rates, enrolment rates and higher tax revenues. Originality/value: The novelty of the paper is that it investigates for the first time, to the best of the authors' knowledge, the presence of non-linearity between corruption and government debt. It proposes non-linear panel cointegration and causality tests, as well as a non-linear panel error correction model that allows for smooth changes between regimes, hence, examining causal relationships in each regime separately. [ABSTRACT FROM AUTHOR]