Dynamic Nexus between Government Revenues and Expenditures in Nigeria: Evidence from Asymmetric Causality and Cointegration Methods

Aminu, Alarudeen and Raifu, Isiaka Akande (2018): Dynamic Nexus between Government Revenues and Expenditures in Nigeria: Evidence from Asymmetric Causality and Cointegration Methods.

Abstract

The incessant fiscal deficit being experienced in different countries across the world has raised concerns about the ability of government to properly manage its revenues and expenditures. This has necessitated a flurry of studies on the relationship between government revenues and government expenditures over time. However, empirical evidence appears to be mixed, even within a country, depending on the methodological approaches adopted by each researcher. In the light of this, this study examines the asymmetric causality and cointegration between revenues and expenditures using aggregated and disaggregated data. The results of linear causality tests of Granger (1969) and Toda-Yamamoto (1995) support fiscal synchronisation hypothesis while those of nonlinear causality test of Diks and Panchenko (2006) support revenue-spending hypothesis. The results further show the existence of asymmetric cointegration between revenues and expenditures in the short-run and the long-run. The final results obtained from the decomposition of revenues into the positive and negative components show that positive change in revenues has a positive effect on expenditures and vice versa for a negative change in revenues. Based on these findings, the panacea proposed to over-reliance in revenues, particularly oil revenues as a determinant of government expenditures, is the proper management of oil revenues and other sources of revenues. The government would also need to diversify the economy so that more revenues could be available to it from other sources to finance its expenditures.

• Item Type: MPRA Paper
• Language: English
• Keywords: Government Revenues, Government Expenditures, Asymmetries, Causality, Cointegration
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C20 - General; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C50 - General; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H27 - Other Sources of Revenue

References

Abdulrasheed, B. (2017). Causality between government expenditure and government revenue in Nigeria. Asian Journal of Economics and Empirical Research, 4(2), 91-98.

Al-Zeaud, H. A. (2014). The causal relationship between government revenue and expenditure in Jordan. Global Journal of Management and Business Research: B Economics and Commerce. Vol. 14, Issue 6, pp. 48-58

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

Aregbeyen, O., and Ibrahim, T. M .,(2012b). The causal relationship between government spending and revenue in an oil-dependent economy: the case of Nigeria. The IUP Journal of Public Finance, 10(1), pp. 6-21

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

Baghestani, H., and McNown, R. (1994). Do revenues or expenditures respond to budgetary disequilibria?. Southern Economic Journal, 311-322.

Baharumshah, A. Z., Jibrilla, A. A., Sirag, A., Ali, H. S., and Muhammad, I. M. (2016). Public revenue‐ expenditure nexus in South Africa: Are there asymmetries?. South African Journal of Economics, 84(4), 520-537.

Ball, L., and Mankiw, N. G. (1995). What do budget deficits do?. National Bureau of Economic Research Working Paper No. 5263

Barro, R. J. (1974). Are government bonds net wealth?. Journal of political economy, 82(6), 1095-1117.

Bekiros, S. D., and Diks, C. G. (2008). The relationship between crude oil spot and futures prices: Cointegration, linear and nonlinear causality. Energy Economics, 30(5), 2673-2685.

Bernheim, B. D. (1989). A neoclassical perspective on budget deficits. The Journal of Economic Perspectives, 3(2), 55-72.

Buchanan, J. M., and Wagner, R. W. (1977). Democracy in deficit: The political legacy of Lord Keynes. New York: Academic Press.

Chang, T., and 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 (Finance a uver), 59(2), 165-172.

Dahlberg, M., and Johansson, E. (1998). The revenues-expenditures nexus: panel data evidence from Swedish municipalities. Applied Economics, 30(10), 1379-1386.

Dickey, D. A., and Fuller, W. A. (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica: Journal of the Econometric Society, 1057-1072.

Diks, C., and Panchenko, V. (2006). A new statistic and practical guidelines for nonparametric Granger causality testing. Journal of Economic Dynamics and Control, 30(9-10), 1647-1669.

Ewing, B. T., Payne, J. E., Thompson, M. A., and Al-Zoubi, O. M (2006). Government expenditures and revenues: Evidence from asymmetric modeling, Southern Economic Journal 73(1), 190.200.

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

Fasano, U., and Wang, Q. (2002). Testing the relationship between government spending and revenue: Evidence from GCC countries. IMF Working Paper WP/02/201,

Friedman, M. (1978). The limitations of tax limitation. Policy Review (summer): 7-14.

Garcia, M. J. (2012). The revenues-expenditures nexus: A panel data analysis of Spain's regions (Running title: Tax-expenditure, expenditure-tax or fiscal synchronization). International Journal of Academic Research in Economics and Management Sciences, 1(1), 24.

Gounder, N., Narayan, P. K., and Prasad, A. (2007) An empirical investigation of the relationship between government revenue and expenditure: The case of the Fiji Islands. International Journal of Social Economics, 34(3), 147-158.

Granger, C. W. J. (1969). Investigating causal relations by econometric model and cross spectral methods, Econometrica, Vol. 7, No. 3, pp. 424-438.

Holtz-Eakin, D., Newey. W., and Rosen, H. S. (1989). The revenues-expenditures nexus: Evidence from local government data. International Economic Review, 415-429.

Ibrahim, T. (2017). Government expenditure-revenue nexus reconsidered for Nigeria: Does structural break matter? University Library of Munich, Germany, MPRA Paper No. 86220

Irandoust, M. (2018). Government spending and revenues in Sweden 1722–2011: evidence from hidden cointegration. Empirica, 45(3), 543-557.

Joulfaian, D., and Mookerjee, R. (1991). Dynamics of government revenues and expenditures in industrial economies. Applied Economics, 23(12), 1839-1844.

Li, X. (2001). Government revenue, government expenditure, and temporal causality: evidence from China. Applied Economics, 33(4), 485-497.

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.

Meltzer, A. H., and Richard, S. F. (1981). A rational theory of the size of government. Journal of political Economy, 89(5), 914-927.

Mohanty, A. R, and Mishra, B. R. (2017). Cointegration between government expenditure and revenue: Evidence from India. Advances in Economics and Business 5(1): 33-40

Musgrave, R. A. (1961). Approaches to a fiscal theory of political federalism. In Public finances: Needs, sources, and utilization. Princeton University Press, pp. 97-134.

Mutascu, M. (2016). Government revenues and expenditures in the East European economies: A bootstrap panel granger causality approach. Eastern European Economics, 54(6), 489-502.

Mutascu, M. (2017). The tax–spending nexus: evidence from Romania using wavelet analysis. Post- Communist Economies, 29(3), 431-447.

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

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

Neftci, S. N. (1984). Are economic time series asymmetric over the business cycle? Journal of Political Economy, 92:307–328

Nimani, A. (2013). Consequences of fiscal deficit. Journal of Economics and International Finance, 5(3), 58-64.

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

Nyamongo, M. E., Sichei, M. M. and Schoeman, N. J. (2007). Government revenue and expenditure nexus in South Africa. South African Journal of Economic and Management Sciences, 10(2), 256- 269.

Obeng, S. K. (2015). A causality test of the revenue-expenditure nexus in Ghana. ADRRI Journal of Arts and Social Sciences, Ghana: Vol. 11, No. 11(1), pp. 1-19, ISSN: 2343- 6891

Obioma, E. C., and Ozughalu, U. M. (2010). An examination of the relationship between government revenue and government expenditure in Nigeria: Cointegration and causality approach. Central Bank of Nigeria, 48(2), 35.

Ogujiuba, K., and Abraham, T. W. (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 expenditures in the G7 countries: cointegration and error-correction models. Applied Economics Letters, 2(1), 19-22.

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

Payne, J. E. (2003). A survey of the international empirical evidence on the tax-spend debate. Public Finance Review, 31(3), 302-324.

Peacock, A. T., and Wiseman, J. (1979). Approaches to the analysis of government expenditure growth. Public Finance Quarterly, 7(1), 3-23.

Pesaran, H., Shin, Y., and Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16, 289-326

Phillips, P. C., and Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335-346.

Phiri, A. (2016). Asymmetries in the revenue–expenditure nexus: new evidence from South Africa. Empirical Economics, 1-33.

Raifu, I. A., and Raheem, A. N. (2018). Do government revenues matter for economic growth? Evidence from Nigeria. European Journal of Government and Economics, 7(1), 60-84.

Roy, A., Sahoo, P., and Kamaiah, B. (2000). A causal test of fiscal synchronisation hypothesis in India (No. 54). Institute for Social and Economic Change, Bangalore.

Saunoris, J. W., and Payne, J. E. (2010). Tax more or spend less? Asymmetries in the UK revenue– expenditure nexus. Journal of Policy Modeling, 32(4), 478-487.

Shin, Y., Yu, B., and Greenwood-Nimmo, M. (2014). Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL Framework. In W. H. (Eds), The festchrift in honor of Peter Schmidt: Econometric methods and applications (pp. 281- 314). New York: Springer.

Stiglitz, J. E., and Walsh, C. E. (2008). The seven deadly deficits. Special Reports, the New Economy.

Takumah, W. (2014). The dynamic causal relationship between government revenue and government expenditure nexus in Ghana. University Library of Munich, Germany.

Tešić, A., Ilić, D., and Đelić, A. T. (2014). Consequences of fiscal deficit and public debt in financing the public sector. Economics of Agriculture, 61(1), 177-194

Tiwari, A. K., and Mutascu, M. (2016). The revenues-spending nexus in Romania: A TAR and MTAR approach. Economic research-Ekonomska istraživanja, 29(1), 735-745.

Toda, H. Y., and Yamamoto, T. (1995). Statistical inferences in vector autoregressions with possibly integrated processes. Journal of Econometrics, 66, pp. 225-50.

Westerlund, J., Mahdavi, S., and Firoozi, F. (2011.) The tax-spending nexus: Evidence from a panel of US state–local governments. Economic Modelling, 28(3), 885-890.

Yinusa, D. O., and Adedokun, A. (2017). Fiscal synchronisation or institutional separation: An examination of tax-spend hypothesis in Nigeria. Journal of Finance, 5(3), 80-87.

Zapf, M., and Payne, J. E. (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