The Dynamic Causal Relationship between Government Revenue and Government Expenditure Nexus in Ghana

Takumah, Wisdom (2014): The Dynamic Causal Relationship between Government Revenue and Government Expenditure Nexus in Ghana.

Abstract

The relationship between government revenue and government expenditure has been an important topic in public economics, given its relevance for policy especially with respect to the budget deficit. The purpose of this paper is to investigate the relationship between government revenue and government expenditure in Ghana for the period of 1986 - 2012. We include GDP as a control variable into the model. Data properties were analyzed to determine their stationarity using the DF-GLS and PP unit root tests which indicated that the series are I(1). We find a cointegration relationship between government revenue and government expenditure. The causality tests indicate that there is a bidirectional causal relationship between government expenditure and revenues in both the long and the short run hence confirming the Fiscal synchronization hypothesis. The policy implication of the results suggests that there is interdependence between government expenditure and revenues. The government makes its expenditure and revenues decision simultaneously. Under this scenario the fiscal authorities of these countries with budget deficits should raise revenues and decrease spending simultaneously in order to control their budget deficits.

• Item Type: MPRA Paper
• Language: English
• Keywords: Government revenue, Government expenditure; Cointegration; Causality, Budget Deficit, Fiscal synchronization, Fiscal policy.
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H20 - General; H - Public Economics > H5 - National Government Expenditures and Related Policies > H50 - General; H - Public Economics > H6 - National Budget, Deficit, and Debt > H62 - Deficit ; Surplus

References

Afonso, A. and Rault, C., (2009). Bootstrap Panel Granger-Causality between Government Spending and Revenue in the EU. Economics Bulletin, 29(4), pp. 2542-2548.

Anderson, W., Wallace, M.S., & Warner, J.T. (1986) Government Spending and Taxation: What Causes What? Southern Economic Journal, 52: 630-639.

Aslan, M. and Taşdemir M., (2009). Is Fiscal Synchronization Hypothesis Relevant for Turkey? Evidence from Cointegration & Causality Tests with Endogenous Structural Breaks. Journal of Money, Investment and Banking; Issue 12, pp. 14-25.

Baghestani, H., & Mcnown, R., (1994). Do Revenue or Expenditure Respond To Budgetary Disequilibria? Southern Economic Journal, 61(2): 311-322.

Banerjee, A., Dolado, J., Galbraith, J. W., & Hendry D. F., (1993). Cointegration, Error Correction and the Econometric Analysis of Non-Stationary Data, Oxford: Oxford University Press.

Banerjee, A. J., Dolado, J. J., & Mestre, R., (1998). Error Correction Mechanism Tests for Cointegration in Single Equation Framework. Journal of Time Series Analysis, 19(3),pp. 267-283.

Blackley, P. (1986). Causality between revenues and expenditures and the size of the Federal budget. Public Finance Quarterly, 14: 139-156.

Bohn, H. (1991). Budget Balance through Revenue or Spending Adjustment: Some Historical Evidence for the United States. Journal of Monetary Economics, 27: 335-359.

Buchanan J.M. & Wagner R.W. (1978); Dialogues concerning Fiscal Religion; Journal of Monetary Economics, 4, 627-636.

Carneiro F.G., Joao, R., & Boubacar, S.B., (2005). Government Revenues and Expenditures in Guinea-Bissau: Causality and Cointegration. Journal of Economic Development, 30(1): 107-117.

Chang, T., & Chiang, G. (2009). Revisiting the Government Revenue-Expenditure Nexus: Evidence from 15 OECD Countries Based On the Panel Data Approach. Czech Journal of Economics and Finance, 59(2): 165-172.

Chang, Tsangyao & Yuan-Hong H., (2002). A Note on Testing “Tax-and-Spend, Spend-and-Tax or Fiscal Synchronization”: The Case of China. Journal of Economic Development, 27(1): 151-160.

Cheng, Benjamin S. (1999). Causality between Taxes and Expenditures: Evidence from Latin American Countries, Vol. 23, No. 2, 184-192.

Darrat A. F. (1998). Tax and Spend, or Spend and Tax: An Inquiry into the Turkish Budgetary Process; Southern Economic Journal; 1998, 64(4), 940-956.

Eita, J.H., & Mbazima, D. (2008). The Causal Relationship between Government Revenue and Expenditure in Namibia” MPRA Paper, No. 9154.

Engle, R. F., Granger, C. W. J. (1987). “Co-integration and Error Correction: Representation, Estimation, & Testing,” Econometrica, 55, 251–276.

Ewing, B.T., & Payne, J.E. (1998) “Government Revenue-Expenditure Nexus: Evidence from Latin America.” Journal of Economic Development, 23(2): 57-69.

Fasano, U. & Wang, Q., (2002). Testing the Relationship between Government Spending and Revenue: Evidence from GCC Countries. IMF Working Paper WP/02/201.

Friedman, M (1978). Limitations of Tax Limitation, Policy Review, 7-14

Hoover K.D., & Sheffrin S.M., (1992). Causation Spending and taxes: Sand in the sand box or tax collector for the welfare state? American Economic Review, 82: 225-248

Jones, J.D. & Joulfaian, D. (1991). Federal government expenditures and revenues in the early years of the American Republic: Evidence from 1792 to 1860. Journal of Macroeconomics, 13(1): 133-155.

Keho, Y. (2010). Estimating the growth-maximizing tax rate for Cote D’Ivoire: Evidence and implications. J. Econ. Int. Finance , 2, 164--174.

Li, X., (2001). Government Revenue, Government Expenditure and Temporal Causality: Evidence from China.” Applied Economics, 33(4): 485-497.

Meltzer, Allan. H., & Richard, S.F., (1981). A Rational Theory of the Size of the Government. The Journal of Political Economy, 89(5): 914-927.

Moalusi, Daniel K. (2004). Causal Link between Government Spending & Revenue: A Case Study of Botswana. Fordham Economics Discussion Paper Series, Number dp2007-07.

Musgrave, Richard A. (1966). Principles of Budget Determination. In A. H. Cameron & W. Henderson (Eds.), Public Finance: Selected Readings (Pp. 15-27). New York: Random House.

Narayan, P. K., Smyth, R., (2005). The Residential Demand for Electricity in Australia: An Application of the Bounds Testing Approach to Cointegration. Energy Policy 33, 467–474.

Narayan, P. K., (2005). Government Revenue and Government Expenditure Nexus: Empirical Evidence from Nine Asian Countries’, Journal of Asian Economics, 15(6), pp. 1203-1216.

Narayan, P.K., & Narayan, S. (2006). Government Revenue and Government Expenditure Nexus: Evidence from Developing Countries. Applied Economics, 38(3): 285-291.

Nyamongo, M.E., Sichei, M.M., & Schoeman, N. J., (2007). Government Revenue and Expenditure Nexus in South Africa. South African Journal of Economic and Management Sciences, 10(2): 256-268.

Odhiambo, N. M. (2009). Energy Consumption and Economic Growth Nexus in Tanzania: An ARDL Bounds Testing Approach. Energy Policy 37 (2), 617–622.

Odhiambo, N. M. (2014). Energy Dependence in Developing Countries: Does the Level of Income Matter? Atlantic Economics Journal 42:65-77

Payne, J. E., (1998). Tax-Spend Debate: Time Series Evidence from State Budgets‘, Public Choice, 95(3-4), pp. 307-20.

Peacock, Alan T. & Wiseman, J. 1961. The Growth of Public Expenditure in the United Kingdom. Princeston, NJ: Princeton University Press for the National Bureau of Economic Research.

Pesaran, M. H., & Shin, Y. (1999). An Autoregressive Distributed Lag Modeling Approach to Cointegration Analysis. In S. Strom (Ed.), Econometrics & Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium, Cambridge: Cambridge University Press.

Pesaran, M. H., Shin, Y. C., & Smith, R. (2001). Bound Testing Approaches to the Analysis of Level Relationships: Journal of Applied Econometrics 16, 289–326.

Ram, R. (1988). Additional Evidence on Causality between Government Revenue and Government Expenditure. Southern Economic Journal, 58: 763-769.

Ross, Kevin L. & James E. Payne (1998). A Reexamination of Budgetary Disequilibria,” Public Finance Review 26(1) 67–79.

Shah, A. & Baffes, J. (1994) “Causality and co-movement between taxes and expenditure: Historical evidence from Argentina, Brazil & Mexico”, Journal of Development Economics, 44: 311-331.

Wolde-Rufael, Y., (2008). The Revenue-Expenditure Nexus: The Experience of 13 African Countries. African Development Review, 20(2): 273-283.