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 vector error correction model (VECM) using real GDP and inflation as control variables over the period 2004Q2–2018Q1.Cointegration and intertemporal (causal) links among variables were established employing Johansen (1995) and Toda-Yamamoto (1995) non-Granger causality tests. The results of the cointegration analysis confirm 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 revenue, 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. On the policy front, the Free State government should adhere to a planned budget process, devise innovative revenue-generating strategies to circumvent the burden of producing inflation revenue, as well as utilize its autonomy on fiscal instruments to maintain a sustainable fiscal policy path, and stimulate economic growth.
References
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[3] Ali, R., Shah, M. 2012. The causal relationship between government expenditure and revenue in Pakistan. Interdisciplinary Journal of Contemporary Research in Business, 3: 323–329.
[4] Al-Zeaud, H.A. 2015. The causal relationship between government revenue and expenditure in Jordan, International Journal of Management & Business Research, 5(2): 117–127. Available at: http://ijmbr.srbiau.ac.ir/article_6383_098a15852a8028ba840ff8ff48cf6bd6.pdf.
[5] Aregbeyen, O., Ibrahim, T.M. 2012. Testing the revenue and expenditure nexus in Nigeria: an application of the bound test approach. European Journal of Social Sciences, 27:374–380.
[6] Baghestani, H., McNown, R. 1994. Do revenues or expenditures respond to budgetary disequilibria? Southern Economic Journal, 61:311-22. DOI: https://doi.org/10.2307/1059979
[7] Baharumshah, A.Z., et al. 2016. Public revenue-expenditure nexus in South Africa: Are There Asymmetries? South African Journal of Economics, 84:520-537. DOI: https://doi.org/10.1111/saje.12130.
[8] Bai, J., Perron, P. 2003. Computation and analysis of multiple structural change models. Journal of Applied Econometrics, 18: 1–22. DOI: https://doi.org/10.1002/jae.659.
[9] Banerjee A., Lumsdaine, R.L., Stock, J.H. 1992. Recursive and sequential tests of the unit-root and trend-break hypotheses: Theory and international evidence. Journal of Business & Economic Statistics, 10: 271-287. DOI: http://dx.doi.org/10.1080/07350015.1992.10509905.
[10] Brown, R.L., Durbin, J., Evans, J.M. 1975. Techniques for testing the constancy of regression relationships over time. Journal of the Royal Statistical Society, Series B (Methodological), 37(2): 149–192. DOI: 10.1111/j.2517-6161.1975.tb01532.x
[11] Buchanan, J.M., Wagner, R.E. 1978. Dialogues concerning fiscal religion. Journal of Monetary Economics, 4(3): 627-636.DOI: https://doi.org/10.1016/0304-3932(78)90056-9.
[12] 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 (Finance a úvĕr), 59(2):165-172. http://journal.fsv.cuni.cz/storage/1157_chang.pdf.
[13] Chang, T., Liu, W.R., Caudill, S.B. 2002. Tax-and-spend, spend-and-tax, or fiscal synchronization: new evidence for ten countries. Applied Economics, 34 (12): 1553-1561. DOI:http://dx.doi.org/10.1080/00036840110103265.
[14] Clark, J.A., Mirza, S. 2006. Comparison of some common methods for detecting Granger noncausality. Journal of Statistical Computation and Simulation, 76(3): 207-231. DOI:https://doi.org/10.1080/10629360500107741.
[15] Elyasi, Y., 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.
[16] Engle, R.F., Granger, C.W.J. 1987. Cointegration and error correction: representation, estimation and testing. Econometrica, 55: 251-76. DOI: https://doi.org/10.2307/1913236
[17] Ewing, B.T., Payne, J.E. 1998. Government revenue-expenditure nexus: evidence from Latin America. Journal of Economic Development, 23: 57–69. http://www.jed.or.kr/full-text/23-2/ewing.PDF.
[18] Friedman, M. 1978. The limitations of tax limitation. Policy Review Summer, 5:7-14. https://miltonfriedman.hoover.org/friedman_images/Collections/2016c21/Stanford_06_01_1978.pdf
[19] Ghartey, E.E. 2010. Cointegration and causal relationship between taxes and spending in Kenya, Nigeria and South Africa. International Economic Journal, 24:267–282. DOI:http://dx.doi.org/10.1080/10168730903510674.
[20] Gonzalo, J. 1994. Five alternative methods of estimating long-run equilibrium relationships. Journal of Econometrics, 60, 203-233. DOI: https://doi.org/10.1016/0304-4076(94)90044-2.
[21] Granger, C.W.J., Lin, J.-L. 2005. Causality in the long run. Econometric Theory, 11: 530-536. DOI:https://doi.org/10.1017/S0266466600009397.
[22] Islam, M.Q. 2001. Structural break, unit root, and the causality between government expenditures and revenues. Applied Economics Letters, 8: 565-567. DOI: https://doi.org/10.1080/13504850010018266
[23] Johansen, S. 1995. Likelihood-based inference in cointegrated vector autoregressive models. Oxford University Press. DOI: https://doi.org 10.1093/0198774508.001.0001
[24] Kavase, K., Phiri, A. 2018. Are fiscal budgets sustainable in South Africa? Evidence from provincial level data. Business and Economic Horizons, 14(2): 415-423.DOI: http://dx.doi.org/10.15208/beh.2018.30.
[25] 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. DOI:https://doi.org/10.5897/JEIF.9000020.
[26] Kollias, C., Paleologou, S.-M. 2006. Fiscal policy in the European Union: tax and spend, spend and tax, fiscal synchronization or institutional separation? Journal of Economic Studies, 33:108–120.DOI:https://doi.org/10.1108/01443580610666064.
[27] Kremers, J.J.M., Ericsson, N.R., Dolado, J.J. 1992. The power of cointegration tests. Oxford Bulletin of Economics and Statistics, 54, 325-346. DOI: https://doi.org 10.1111/j.1468-0084.1992.tb00005.x
[28] Lusinyan, L., Thornton, J. 2007. The revenue-expenditure nexus: Historical evidence for South Africa. South African Journal of Economics, 75:496–507. DOI: https://doi.org 10.1111/j.1813-6982.2007.00129.x
[29] Magazzino, C. 2013. Revenue-expenditure nexus: a case study of ECOWAS. Open-Assessment E-Journal, 1–27. DOI: http://dx.doi.org/10.5018/economics-ejournal.ja.2013-13.
[30] Marlow, M.L., Manage, N. 1987. Expenditures and receipts: Testing for causality in state and local government finances. Public Choice, 53:243-55, http://www.jstor.org/stable/30024755.
[31] Mehrara, M., Pahlavani, M., 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, http://www.ijbssnet.com/journal/index/312.
[32] Meltzer, A.H., Richard, S.F. 1981. A rational theory of the size of the government. Journal of Political Economy, 89:914-27, http://www.jstor.org/stable/1830813.
[33] Musgrave, R.A. 1966. Principles of budget determination. In Cameron, A.H., and Henderson, W (eds.), Public finance: Selected readings, 15-27. New York: Random House.
[34] Narayan, P.K., Narayan, S. 2006. Government revenue and government expenditure nexus: Evidence from developing countries. Applied Economics, 38(3): 285–291. DOI:https://doi.org/10.1080/00036840500369209.
[35] Ndahiriwe, K., Gupta, R. 2010. Temporal causality between taxes and public expenditures: the case of South Africa. The Journal of World Economic Review, 6:87–100.
[36] Nyamongo, M.E., Sichei, M.M., Schoeman, N.J. 2007. Government revenue and expenditure nexus in South Africa. South African Journal of Economic Management Sciences, 10: 256–268, https://sajems.org/index.php/sajems/article/view/586/228.
[37] Owoye, O., Onafowora, O.A. 2010. The relationship between tax revenues and government expenditures in European Union and non-European Union OECD countries. Public Finance Review, 39(3): 429–461. DOI: https://doi.org/10.1177/1091142110386211.
[38] Payne, J.E. 1998. The tax-spend debate: time series evidence from state budgets. Public Choice, 95: 307-320. DOI: https://doi.org/10.1023/A:1004906125307.
[39] Payne, J.E. 2003. A survey of the international empirical evidence on the tax-spend debate. Public Finance Review, 31: 302-324.DOI: https://doi.org/10.1177/1091142103031003005.
[40] Peacock, A.T., Wiseman, J.1961. The growth of public expenditure in the United Kingdom. National Bureau of Economic Research. Princeton University Press.
[41] Peacock, A.T., Wiseman, J. 1979. Approaches to the analysis of government expenditure growth. Public Finance Quarterly, 7(1): 3-23. DOI: https://doi.org/10.1177/109114217900700101.
[42] Perron, P. 2006. Dealing with structural breaks. Palgrave Handbook of Econometrics 1: 278-352.
[43] Perron, P. 2017. Unit Roots and Structural Breaks. MDPI Open Access Journal, Econometrics, 5(2), 22: 1-3. DOI: https://doi.org/10.3390/econometrics5020022.
[44] Phillips, P.C.B., Perron, P. 1988. Testing for a unit root in time series regression. Biometrika, 75 (2): 335-346.DOI: https://doi.org/10.1093/biomet/75.2.335.
[45] Phiri, A. 2019. Asymmetries in the revenue–expenditure nexus: new evidence from South Africa. Empirical Economics, 56:1515–1547. DOI: https://doi.org/10.1007/s00181-017-1397-0.
[46] Rahman, A.S.M., Wadud, A.Md. 2014. Tax and Spend, Spend and Tax, Fiscal Synchronization or Fiscal Neutrality: Evidence from Bangladesh. The International Journal of Applied Economics and Finance, 8 (3): 98-108. DOI: https://doi.org 10.3923/ijaef.2014.98.108. ISBN 1991-0886.
[47] Raza, S.A., Hassan, S.Z., Sharif, A. 2019. Asymmetric relationship between government revenues and expenditures in a developing economy: evidence from a non-linear model. Global Business Review, 20 (5): 1179-11951. DOI: https://doi.org/10.1177/0972150919846800.
[48] Saunoris, J.W. 2015. The dynamics of the revenue–expenditure nexus: evidence from US state government finances. Public Finance Review, 43(1):108-134. DOI: https://doi.org 10.1177/1091142113515051
[49] Stock, J.H., Watson, W.M. 1988. Variable trends in economic time series. Journal of Economic Perspectives, 2(3):147-174. https://www.princeton.edu/~mwatson/papers/Stock_Watson_JEP_1988.pdf.
[50] Tiwari, A.K., Mutascu, M. 2016. The revenues-spending nexus in Romania: a TAR and MTAR approach. Economic Research-Ekonomska Istraživanja, 29(1): 735–745. DOI:https://doi.org/10.1080/1331677X.2016.1197549.
[51] Toda, H.Y., Yamamoto, T. 1995. Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, 66: 225-250. DOI: https://doi.org 10.1016/0304-4076(94)01616-8
[52] Vogelsang, T.J., Perron, P. 1998. Additional Tests for a unit root allowing for a break in the trend function at an unknown time. International Economic Review, 39 (4): 1073-1100. DOI:https://doi.org/10.2307/2527353.
[53] Von Furstenberg, G.M., Green, R.J., and Jeong, J.H. 1986. Tax and spend, or spend and tax? Review of Economics and Statistics, 68 (2): 179-188. DOI: https://doi.org/10.2307/1925496.
[54] Wildavsky, A. 1988. The New Politics of the Budgetary Process. Scott, Foresman. Glenview, Illinois.
[55] Wolde-Rufael, Y. 2008. The Revenue–Expenditure Nexus: The Experience of 13 African Countries. African Development Review, 20(2): 273-283. DOI: https://doi.org/10.1111/j.1467-8268.2008.00185.x.
[56] Zapata, H.O., and Rambaldi, N.A. 1997. Monte Carlo Evidence on Cointegration and Causation. Oxford Bulletin of Economics and Statistics, 59(2): 285-298. DOI: https://doi.org/10.1111/1468-0084.00065.
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Published
2020-12-31
How to Cite
OMOSHORO-JONES, Oyeyinka S..
INVESTIGATING THE GOVERNMENT REVENUE–EXPENDITURE NEXUS: EMPIRICAL EVIDENCE FOR THE FREE STATE PROVINCE IN A MULTIVARIATE MODEL.
Theoretical and Practical Research in Economic Fields, [S.l.], v. 11, n. 2, p. 138-156, dec. 2020.
ISSN 2068-7710.
Available at: <https://journals.aserspublishing.eu/tpref/article/view/5783>. Date accessed: 24 apr. 2024.
doi: https://doi.org/10.14505/tpref.v11.2(22).08.
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Articles
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