Asymmetries in the revenue-expenditure nexus: New evidence from South Africa

Phiri, Andrew (2016): Asymmetries in the revenue-expenditure nexus: New evidence from South Africa.

Abstract

In this study, we relax the conventional assumption of a linear cointegration relationship in the revenue-expenditure nexus by examining asymmetric equilibrium effects in the South African fiscal budget using quarterly data collected between 1960:Q1 and 2016:Q2. Our mode of empirical investigation is the MTAR model supplemented with a TEC component. Our estimation results can be summarized into three main empirical findings. Firstly, we find that the long-run elasticity between revenue and expenditure is less-than-unity which implies that the fiscal budget is weakly unsustainable. Secondly we find that positive ‘shocks’ to the fiscal budget are eradicated fairly quickly which means that fiscal authorities must implement their policies in a continuous, on-going fashion over the long run. Lastly, we observe bi-directional causality between revenues and expenditures which offers support in favour of the fiscal synchronization hypothesis. This last result implies that fiscal authorities should amend fiscal imbalances through increased consolidation between revenue collection and expenditure allocation.

• Item Type: MPRA Paper
• Language: English
• Keywords: Revenue; Expenditure; Fiscal budget sustainability; Threshold cointegration; MTAR; Causality; South Africa.
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C12 - Hypothesis Testing: General; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; 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; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; H - Public Economics > H6 - National Budget, Deficit, and Debt > H61 - Budget ; Budget Systems; 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), 2542-2548.

Aisha Z. and Khatoon S. (2010), “Government expenditure and tax revenue, causality and cointegration: The experience of Pakistan 1972-2007”, The Pakistan Development Review, 48(4), 951-959.

Aladejare S. (2014), “Evaluation of government income-spending hypothesis nexus in Nigeria: Application of the bounds test approach”, American Journal of business, Economics and Management, 2(1), 29-40.

Al-Khulaifi A. (2012), “The relationship between government revenue and expenditure in Qatar: A cointegration and causality investigation”, International Journal of Economics and Finance, 4(9) 142-148.

Al-Quadir K. (2005), “The relationship between government expenditures and revenues in the Kingdom of Saudi Arabia: Testing for co-integration and causality”, JKAU: Econ. & Adm., 19(1), 31-43.

Al-Zeaud H. (2014), “The causal relationship between government revenue and expenditure in Jordan”, Global Journal of Management and Business Research, 14(6), 1-11.

Ali R. and Shah M. (2012), “The casual relationship between government expenditure and revenue in Pakistan, Interdisciplinary Journal of Contemporary Research in Business, 3(12), 323-329.

Anderson W., Wallace M. and Warner J. (1986), “Government spending and taxation: What causes what?”, Southern Economic Journal, 52(3), 630-639.

Apergis N., Payne J. and Saunoris J. (2012), “Tax-spend in Greece: Are there asymmetries?”, Journal of Economic Studies, 39, 327-336.

Aregbeyen O. and Ibrahim T. (2012), “Testing the revenue and expenditure nexus in Nigeria: An application of the bound test approach”, European Journal of Social Science, 27(3), 374-380.

Arestis P., Cipollini A. and Fattouh B. (2004), “Threshold effects in the US budget deficit”, Economic Inquiry, 42(2), 214-222.

Aslan M. and Tasdemir M. (2009), “Is fiscal synchronization hypothesis relevant for Turkey? Evidence from cointegation and causality tests with endogenous structural breaks”, Journal of Money, Investment and Banking, 12, 14-25.

Athanasenas A., Katrakilikdis C. and Trachanas E. (2014), “Government spending and revenues in the Greek economy: Evidence from nonlinear cointegration”, Empirica, 41(2), 365-376.

Aworinde O. (2013), “The tax-spend nexus in Nigeria: Evidence from nonlinear causality”, Economics Bulletin, 33(4), 3117-3130.

Aworinde O. and Ogundipe M. (2015), “The tax-spend nexus in Nigeria: Evidence from asymmetric modelling”, The Journal of Developing Areas, 49(1), 39-51.

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

Baghestani H. and McNown R. (1994), “Do revenues or expenditures respond to budgetary disequilibria?”, Southern Economic Journal, 63, 2542-2548.

Baharumshah A., Jibrilla A., Sirag A., Ali H. and Muhammad I. (2016), “Public revenue-expenditure nexus in South Africa: Are there asymmetries”, South African Journal of Economics, (forthcoming).

Bajo-Rubio O., Diaz-Roldan C. and Esteve V. (2004), “Searching for threshold effects in the evolution of budget deficits: An application to the Spanish case”, Economic Letters, 28, 239-234.

Bajo-Rubio O., Diaz-Roldan C. and Esteve V. (2006), “Is the budget deficit sustainable when fiscal policy is nonlinear? The case of Spain”, Journal of Macroeconomics, 28, 596-608.

Barro R. (1979), “On the determination of public debt”, Journal of Political Economy, 81, 940-971.

Bella M. and Quinteri B. (1995), “Causality between public expenditure and taxation: Evidence from the Italian case”, Economic Notes, 24(1), 45-68.

Blackley P. (1986), “Causality between revenues and expenditures and the size of federal budget”, Public Finance Quarterly, 14(2), 139-156.

Bohn H. (1991), “Budget balance through revenue or spending adjustments? Some historical evidence for the United States”, Journal of Monetary Economics, 27, 333-359.

Bolat S. (2014), “The relationship between government revenues and expenditures: Bootstrap panel granger causality analysis on European countries”, The Economic Research Guardian, 4(2), 58-73.

Buchanan J. and Wagner R. (1978), “Dialogues concerning fiscal religions”, Journal of Monetary Economics, 4, 627-636.

Carneiro F., Joao R. and Boubacar S. (2005), “Government revenues and expenditures in Guinea-Bissau: Causality and cointegration”, Journal of Economic Development, 30(1), 107-117.

Chang T., Liu W. and Caudill S. (2002), “Tax-and-spend, spend-and-tax, or fiscal synchronization: New evidence from ten countries”, Applied Economics, 34, 1553-1561.

Chang T. and Chiang G. (2009), “Revisiting the revenue-expenditure nexus: Evidence from 15 OECD countries based on the panel data approach”, Czech Journal of Economics and Finance, 59(2), 165-172.

Cipollini A., Fattouh B. and Mouratidis C. (2009), “Fiscal re-adjustments in the United States: A nonlinear time series analysis”, Economic Enquiry, 47, 34-54.

Darrat A. (1998), “Tax and spend, spend and tax: An inquiry into the Turkish budgetary process”, Southern Economic Journal, 64(4), 940-956.

Dogan E. (2013), “Does ‘revenue-led spending’ or ‘spending-led revenue’ hypothesis exist in Turkey?”, British Journal of Economics, Finance and Management Sciences, 8(2), 62-75.

Eita J. and Mbazima D. (2008), “The causal relationship between government revenue and expenditure in Namibia”, Journal of Economic and Financial Sciences, 2, 175-186.

Elyasil Y. and Rahimi (M. 2012), “The causality between government revenue and government expenditure in Iran”, International Journal of Economic Sciences and Applied Research, 5(1), 129-145.

Enders W. and Granger C. (1998), “Unit root tests and asymmetric adjustment with an example using the term structure of interest rates”, Journal of Business and Economic Statistics, 16(3), 304-311.

Enders W. and Siklos P. (2001), “Cointegration and threshold adjustment”, Journal of Business and Economic Statistics, 19(2), 166-176.

Engle R. and Granger C. (1987), “Co-integration and error correction: Representation, estimation and testing”, Econometrica, 55(2), 166-176.

Ewing B. and Payne J. (1998), “Government revenue-expenditure nexus: Evidence from Latin America”, Journal of Economic Development, 23(2), 57-69.

Ewing B., Payne J., Thompson M. and Al-Zoubi O. (2006), “Government expenditures and revenues: Evidence from asymmetric modelling”, Southern Economic Journal, 73, 190-200.

Friedman M. (1978), “The limitations of tax limitations, Policy Review, Summer, 7-14.

Garcia S. and Henin P. (1999), “Balancing budget through tax increases or expenditure cuts: Is it neutral?”, Economic Modeling, 16, 591-612.

Ghartey E. (2010), “Cointegration and causal relationship between taxes and spending in Kenya, Nigeria and South Africa”, International Economic Journal, 24(2), 267-282.

Gil-Alana L. (2009), “Government expenditures and revenues: Evidence of fractional cointegration in an asymmetric model”, International Advances in Economic Research, 15, 143-155.

Haikko C. and Rush M. (1991), “Is the budget deficit ‘Too Large’?, Economic Inquiry, 29, 99-126.

Hansen B. (2000), “Sample spitting and threshold estimation”, Econometrica, 68, 575-603.

Hatemi-J A. and Skukur G. (1999), “The causal nexus of government spending and revenue in Finland: A bootstrap approach”, Applied Economic Letters, 6, 641-644.

Hong J. (2009), “Tax-spend or spend-tax? Empirical evidence from Malaysia”, Asian Academy of Management Journal of Accounting and Finance, 5(1), 107-115.

Hoover K. and Sheffrin S. (1992), “Causation, spending and taxes: Sand in the sandbox or the tax collector for the welfare state?”, American Economic Review, 82(1), 225-248.

Huang C. and Tan D. (1992), “Government revenue, expenditure and national income: A granger causal analysis of the case of Taiwan”, China Economic Review, 3(2), 135-148.

Hylleberg S., Engle R., Granger C. and Yoo B. (1990), “Seasonal integration and cointegration”, Journal of Econometrics, 44, 215-238.

Jalil A. and Hye A. (2010), “Revenue and expenditure nexus: A case study of Romania”, Romanian Journal of Fiscal Policy, 1(1), 22-28.

Jibao S., Schoeman and Naraidoo R. (2012), “Fiscal regime changes and the sustainability of fiscal imbalance in South Africa: A smooth transition error-correction approach”, South African Journal of Economic and Management Sciences, 15(2), 112-127.

Jones J. and Joulifain D. (1991), “Federal government expenditures and revenues in the early years of the American public: Evidence from 1792-1860”, Journal of Macroeconomics, 13(1), 133-155.

Joulifain D. and Mookerjee R. (1991), “Dynamics of government revenues and expenditures in industrialized economies”, Applied Economics, 23, 1839-1844.

Karim Z., Asri N., Antoni A. and Yusoff Z. (2006), “The relationship between federal government revenue and spending: Empirical evidence from Asean-5 countries”, Journal Ekonomi Pembangunan, 11, 91-113.

Katrakilidis C. (1997), “Spending and revenue in Greece: New evidence from error correction modelling”, Applied Economics, 4, 387-391.

Keho Y. (2010), “Budget balance through revenue or spending adjustments? An econometric analysis of the Ivorian budgetary process: 1960-2005”, Journal of Economics and International Finance, 2(1), 1-11.

Keho Y. (2011), “The government spending and revenue nexus for Cote d’Ivoire: New evidence from multivariate threshold cointegration modelling”, International Journal of Economics, 5(1), 39-47.

Kollias C. and Makrydakis S. (1995), “The causal relationship between tax revenues and government spending in Greece”, Cyprus Journal of Economics, 8, 3-11.

Kollias C. and Makrydakis S. (2000), “Tax and spend or spend and tax? Empirical evidence from Greece, Spain, Portugal and Ireland”, Applied Economics, 32, 533-546.

Kollias C. and Paleoloou S. (2006), “Fiscal policy in the European Union: tax and spend, spend and tax, fiscal synchronization or institutional separation?”, Journal of Economic Studies, 33(2), 108-120.

Koren S. and Stiassny A. (1995), “Tax and spend or spend and tax? An empirical investigation for Austria”, Empirica, 22, 127-149.

Koren S. and Stiassny A. (1998), “Tax and spend or spend and tax? An international study”, Journal of Policy Modeling, 20(2), 163-191.

Konukcu-Onal D. and Tosun N. (2008), “Government revenue-expenditure nexus: Evidence from several transition economies”, Ekonomski Anali, 53(178-179), 145-156..

Kwiatkowski D., Phillips P., Schmidt P and Shin Y. (1992), “Testing the null hypothesis of stationarity against the alternative of a unit root”, Journal of Econometrics, 54(1-3), 159-178.

Li X. (2001), “Government revenue, government expenditure and temporary causality: Evidence from China”, Applied Economics, 33, 485-497.

Lukovic S. and Grbic M. (2014), “The causal relationship between government revenue and expenditure in Serbia”, Economic Themes, 52(2), 127-138.

Lusinyan L. and Thornton J. (2007), “The revenue-expenditure nexus: Historical evidence for South Africa”, South African Journal of Economics, 75, 496-507.

Magazzino C. (2012), “Revenue expenditure nexus: A case study of ECOWAS”, Economics-Ejournal Discussion Paper No. 2012-57, November.

Magazzino C. (2014), “The relationship between revenue and expenditure in the ASEAN countries”, East Asia, 31(3), 203-221.

Manage N. and Marlow M. (1986), “The causal relation between federal expenditures and receipts”, Southern Economic Journal, 52, 617-629.

Mehrara M., Pahlavani M. and Elyasi Y. (2011), “Government revenue and government expenditure nexus in Asian countries: Panel cointegration and causality”, International Journal of Business and Social Science, 2(7), 199-207.

Mehrara M., Musai M. and Karsalari A. (2011), “The relationship between revenue and expenditure in oil exporting countries”, International Journal of Business and Bahavioral Science, 2(6), 1-7.

Meltzer A. and Richard S. (1981), “A rational theory of the size of government”, Journal of Political Economy, 89, 914-927.

Moalusi D. (2004), “Causal link between government spending and revenue: A case study of Botswana”, Fordham Economics Discussion Paper No. dp. 2007-07.

Murat A. and Murat T. (2009), “Is fiscal synchronization hypothesis relevant for Turkey? Evidence from cointegration and causality tests with endogenous structural breaks”, Journal of Money, Investment and Banking, 12, 14-25.

Mutascu M. (2015), “A bootstrap panel granger causality analysis of government revenues and expenditures in PIIGS countries”, Economics Bulletin, 35(3), 2000-2004.

Mutascu M. (2016), “Government revenues and expenditures in the East European economies: A bootstrap panel granger causality approach”, Eastern Europe Economics, 00, 1-14.

Musgrave R. (1966), “Principles of budget determination”, Public Finance: Selected Readings In: H. Cameron and W. Henderson (Eds), Random House, New York.

Miller S. and Russek F. (1990), “Cointegration and error correction models: The temporal causality between government and taxes”, Southern Economic Journal, 221-229.

Mithani D. and Khoon G. (1999), “Causality between government revenue and expenditure in Malaysia: A seasonal cointegration test”, ASEAN Economic Bulletin, 16(1), 68-79.

Nanthakumar L., Kogid M., Sukemi M and Muhamad S. (2011), “Tax revenue and government spending constraints: Empirical evidence from Malaysia”, China-USA Business Review, 10(9), 779-784.

Narayan P. (2005), “The government revenue and government expenditure nexus: Evidence from nine Asian countries”, Journal of Asian Economics, 15(6), 1203-1216.

Narayan P. and Narayan S. (2006), “Government revenue and government expenditure nexus: Evidence from developing countries”, Applied Economics, 38(3), 285-291.

Ndahiriwe K. and Gupta R. (2010), “Temporal causality between taxes and public expenditures: The case of South Africa”, The Journal of World Economic Review, 6(1), 87-100.

Nwosu D. and Okafor H. (2014), “Government revenue and expenditure in Nigeria: A Disaggregate analysis”, Asian Economic and Financial Review, 4(7), 877-892.

Nyamongo M., Sichei M. and Schoeman N. (2007), “Government revenue and expenditure nexus in South Africa”, South African Journal of Economic and Management Sciences, 10(2), 256-268.

Obeng S. (2015), “A causality test of the revenue-expenditure nexus in Ghana”, ADRRI Journal of Arts and Social Sciences, 11(1), 1-19.

Obioma E. and Ozughalu U. (2010), “an examination of the relationship between government revenue and government expenditure in Nigeria: Cointegration and causality approach, Economic and Financial Review, 48(2), 35-57.

Ogujiuba K. and Abraham T. (2012), “Testing the relationship between government revenue and expenditure: Evidence from Nigeria”, International Journal of Economics and Finance, 4(11), 172-182.

Owoye O. (1995), “The causal relationship between taxes and expenditure in the G-7 countries: Cointegration and error correction models”, Applied Economic Letters, 2, 19-22.

Paleologou S. (2013), “Asymmetries in the revenue-expenditure nexus: A tale of three countries”, Economic Modelling, 30, 52-60.

Park W. (1998), “Granger causality between government revenues and expenditures in Korea”, Journal of Economic Development, 23, 145-155.

Payne J., Mohammadi H. and Cak M. (2008), “Turkish budget deficit sustainability and the revenue-expenditure nexus”, Applied Economics, 40, 823-830.

Peacock A. and Wiseman J. (1979), “Approaches to the analysis of government expenditures growth, Public Finance Quarterly, 2-23.

Petanlar S. and Sadeghi S. (2012), “Relationship between government spending and revenue: Evidence from oil exporting countries”, International Journal of Economics and Management Engineering, 2(2), 33-35.

Phiri A. (2016), “Nonlinearities in Wagner’s law: Further evidence from South Africa”, MPRA Working Paper No. 71702, June.

Piergallini A. and Postigliola M. (2013), “Nonlinear budgetary policies: Evidence from 150 years of Italian Public Finance”, Economic Letters, 121(3), 495-498.

Provopoulos G. and Zambaras A. (1991), “Testing for causality between government spending and taxation”, Public Choice, 68, 277-282.

Ram R. (1988), “Additional evidence on causality between government revenue and government expenditure”, Southern Economic Journal, 54, 763-769.

Saunoris J. and Payne J. (2010), “Tax more or spend less? Asymmetries in the UK revenue-expenditure nexus”, Journal of Policy Modeling, 32, 478-487.

Taha R. and Loganathan N. (2008), “Causality between tax revenue and government spending in Malaysia”, The International Journal of Business and Finance Research, 2(2), 63-73.

Takumah W. (2015), “The dynamic causal relationship between government revenue and government expenditure nexus in Ghana”, MPRA Working Paper No. 58579, September.

Tiwari A. and Mutascu M. (2016), “The revenues-spending nexus in Romania: A TAR and MTAR approach”, Economic Research-Ekonomska Istrazivanja, 29(1), 735-745.

Tsen W. and Ping L. (2005), “The relationship between government revenue and expenditure in Malaysia”, International Journal of Management Studies, 12(2), 53-72.

Valeriu N. (2010), “Estimating long-run equilibrium relationship between government expenditures and revenues in Romania”, Budgetary Research Review, 2(1), 26-44.

Von Furstenburg G., Green R. and Jeong J. (1986), “Tax and spend, or spend and tax?”, Review of Economics and Statistics, 68(2), 179-188.

Wildavsky A. (1988), “The new politics of the budgetary process”, Scott, Glenview: Illinois.

Wolde-Rufael Y. (2008), “The revenue-expenditure nexus: The experience of 13 African countries”, African Development Review, 20(2), 273-283.

Young A. (2011), Do US federal revenues and expenditures respond asymmetrically to budget disequilibria?, Applied Economics Letters, 18, 749-752.

Zapf M. and Payne J. (2009), “Asymmetric modelling of the revenue-expenditure nexus: Evidence from aggregate state and local government in the US”, Applied Economics Letters, 16(9), 871-876.