Causal Link between Central Government Revenue and Expenditure: Evidence for India

Yashobanta, Yashobanta Parida and smruti, Smruti Ranjan Behera (2012): Causal Link between Central Government Revenue and Expenditure: Evidence for India.

Abstract

This paper attempts to analyze the causal relationship between central government revenue and expenditure for India using annual data over the period 1970-2008. The Johansen cointegration test suggests that there is a long-run relationship between central government revenue and expenditure. The result from Granger causality test based on Vector Error Correction Models (VECM) suggests bidirectional causality between central government revenues and expenditures in the long-run supporting Fiscal Synchronization hypothesis. Under this hypothesis, our finding indicates that the fiscal authority of India should try to raise revenue and cut expenditure simultaneously in order to control the respective fiscal deficit. The short-run Granger causality test based on WALD test restriction suggests unidirectional causality from expenditure to revenue supporting “Spend-and-Tax” hypothesis. This hypothesis suggests that the unsustainable fiscal imbalances can be mitigated by policies that adjusted government expenditure.

• Item Type: MPRA Paper
• Language: English
• Keywords: Revenue, Expenditure, Deficit, Causality, Cointegration
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O23 - Fiscal and Monetary Policy in Development; P - Economic Systems > P3 - Socialist Institutions and Their Transitions > P35 - Public Economics; H - Public Economics > H5 - National Government Expenditures and Related Policies > H53 - Government Expenditures and Welfare Programs; H - Public Economics > H6 - National Budget, Deficit, and Debt > H68 - Forecasts of Budgets, Deficits, and Debt

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