Investigating the Government Revenue–Expenditure Nexus: Empirical Evidence for the Free State Province in a Multivariate Model.

Omoshoro-Jones, Oyeyinka Sunday (2020): Investigating the Government Revenue–Expenditure Nexus: Empirical Evidence for the Free State Province in a Multivariate Model.

Abstract

This paper examines the government revenue–expenditure nexus for the Free State Province in a multivariate modelling framework using real GDP and inflation as control variables over the period 2004Q2–2018Q1. Cointegration and intertemporal (causal) links among variables were established employing Johansen-Juselius (1990) within a vector error correction model (VECM) and Toda-Yamamoto (1995) non-Granger causality test. Cointegration analysis affirms the existence of a long-run relationship between variables. The results of the causal analyses show a bidirectional causality between government revenues and expenditures in both the long-run and short-run, supporting the fiscal synchronization hypothesis. Real GDP and inflation individually Granger-causes government revenues in both the long-run and short-run, stressing their importance on generating revenue. Based on these findings, an isolated fiscal measure to raise tax-revenues or cut expenditure will exacerbate fiscal imbalance. The Free State government through its provincial treasury should adhere to a planned budget process, devise innovative revenue-generating strategies to circumvent the burden of producing inflation revenue, and effectively use its autonomy on fiscal instruments to maintain a sustainable fiscal policy path and stimulate economic activity level.

• Item Type: MPRA Paper
• Language: English
• Keywords: VECM, Expenditure, Revenue, Causality, Cointegration, Free State province.
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C54 - Quantitative Policy Modeling; E - Macroeconomics and Monetary Economics > E0 - General > E00 - General; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E61 - Policy Objectives ; Policy Designs and Consistency ; Policy Coordination; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy

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