The government revenue and government expenditure nexus: empirical evidence from nine Asian countries

The nexus between government revenue and government expenditure has been an important topic in public economics. In this paper, we investigate evidence for cointegration and causality between government revenue and government expenditure for nine Asian countries. We use the recently developed bounds testing approach to cointegration and the conventional F-test to examine Granger causality. Our empirical results suggest that for three out of the nine countries government revenue and government expenditure are cointegrated. Our results on the direction of causation are mixed: (a) for Indonesia, Singapore, Sri Lanka in the short-run and for Nepal in both the short- and long-run we find support for the tax-and-spend hypothesis; (b) Indonesia and Sri Lanka are in conformity with the spend-and-tax hypothesis in the long-run; and (c) for other countries there is evidence of neutrality.     

The Revenue–Expenditure Nexus: The Experience of 13 African Countries

Abstract: The aim of this paper is to investigate the causal relationship between government revenue and government expenditure for 13 African countries within a multivariate framework using a modified version of the Granger causality test due to Toda and Yamamoto (1995) . The empirical evidence suggests that there was a bi‐directional causality running between expenditure and revenue for Mauritius, Swaziland and Zimbabwe; no causality in any direction for Botswana, Burundi and Rwanda; unidirectional causality running from revenue to expenditure for Ethiopia, Ghana, Kenya, Nigeria, Mali and Zambia; and a uni‐directional causality running from expenditure to revenue for Burkina Faso only.     

WAGNER'S LAW: AN ECONOMETRIC TEST FOR SOUTH AFRICA, 1960‐2006

The main objective for this paper is to test Wagner's law by analysing the causal relationships between real government expenditure and real income for South Africa for the period 1960‐2006. The paper tests the long‐run relationship between the two variables using the autoregressive distributive lag approach to cointegration suggested by Pesaran et al. We use the Granger non‐causality test procedure developed by Toda and Yamamoto, which uses a vector autoregression model to test for the causal link between the two. Evidence of cointegration is sufficient to establish a long‐run relationship between government expenditure and income. However, support for Wagner's law would require unidirectional causality from income to government expenditure. Therefore, cointegration should be seen as a necessary condition for Wagner's law, but not sufficient. This research does find a long‐run relationship between real per capita government expenditure and real per capita income. Results for the short‐run causality find bidirectional causality. On the basis of empirical results in this paper, one may tentatively conclude that Wagner's law finds no support in South Africa.     

Fiscal Sustainability in the EU

We assessed the sustainability of fiscal policy in the 28 European Union countries over the 1980-2015 years. Panel unit root tests in the presence of cross-sectional dependence showed that government revenues, expenditures, the primary balance, and debt were non-stationary series. However, cointegration tests reveled that a long-run relationship exists between government revenues and expenditures as well as between government primary deficit and debt. The results of causality tests were in line with the neutrality hypothesis: government revenues do not cause the expenditures, and vice versa. Furthermore, mixture models analyses indicated the presence of three homogeneous clusters, one of which included Portugal, Ireland, Italy, Greece, and Spain (PIIGS), whose coefficient of 0.68 indicates the absence of sustainability, since government expenditures grow faster than revenues.     

The role of federal funding on the demand for state and local government spending

Federal aid to state and local governments lowers the perceived tax price of state and local government output and, in this way, affects the demand for state and local government. After reviewing some theoretical models, an empirical investigation using data from 1960–89 shows that federal aid makes the demand for state and local government spending more income-elastic. State and local government expenditures have grown more rapidly than federal government expenditures since 1960 and there is some empirical support for the idea that federal aid was an important contributing factor.     

福建省税收负担对经济增长影响的计量分析

回顾了经济增长理论中政府税收对经济增长影响的分析和国内学者对我国税收和经济增长关系所进行的研究,利用福建省1979—2008年经济增长和宏观税负的数据进行协整分析和Granger因果检验。实证分析的结果表明:福建省的人均GDP和财政收入存在长期稳定的均衡关系,不存在Granger因果关系。本文进一步提出了政策建议。     

EXPORT‐LED GROWTH HYPOTHESIS: FURTHER ECONOMETRIC EVIDENCE FROM SOUTH ASIA

This paper examines the export‐led growth (ELG) hypothesis for five South Asian countries through cointegration and multivariate Granger causality tests. Strong support for a long‐run relationship among exports, imports, and real output for all the countries except Sri Lanka were found. Feedback effects between exports and GDP for Bangladesh and Nepal and unidirectional causality from exports to output in the case of Pakistan were found. No causality between these variables was found for Sri Lanka and India, although for India GDP and exports did induce imports. A feedback effect between imports and GDP was also documented for Pakistan, Bangladesh, and Nepal, as well as unidirectional causality from imports to output growth for Sri Lanka. These and other findings are discussed from the standpoint of the export‐led growth hypothesis.     

Japanese government debt and sustainability of fiscal policy

We construct quarterly series of the revenues, expenditures, and debt outstanding for Japan from 1980 to 2010, and analyze the sustainability of the fiscal policy. We pursue three approaches to examine the sustainability. First, we calculate the minimum tax rate that stabilizes the debt to GDP ratio given the future government expenditures. Using 2010 as the base year, we find that the government revenue to GDP ratio must rise permanently to 40–47% (from the current 33%) to stabilize the debt to GDP ratio. Second, we estimate the response of the primary surplus when the debt to GDP ratio increases. We allow the relationship to fluctuate between two “regimes” using a Markov switching model. In both regimes, the primary surplus to GDP ratio fails to respond positively to debt, which suggests the process is explosive. Finally, we estimate a fiscal policy function and a monetary policy function with Markov switching. We find that the fiscal policy is “active” (the tax revenues do not rise when the debt increases) and the monetary policy is “passive” (the interest rate does not react to the inflation rate sufficiently) in both regimes. These results suggest that the current fiscal situation for the Japanese government is not sustainable.     

Government revenue, expenditure, and national income: A granger causal analysis of the case of Taiwan

An understanding of the causalities among government receipts, outlays and national income in developing countries may shed some light on the type of government finance favorable to economic prosperity. However, there is no consensus in theories and empirical studies about the causal order among the three variables. This study evaluates their causal relationships in Taiwan within a framework of trivariate autoregression model. We find that there are feedbacks between GNP and government expenditure, on the one hand, and between government revenue and GNP, on the other hand. But there is only a one-way causality running from government revenue to government expenditure. The two bidirectional causalities seem to fit the expectation of fiscal activism. However, the causal flow from government revenue to expenditure indicates the constraint of the former on the latter. Therefore, we call this general causal pattern among the three variables in Taiwan as “constrained fiscal activism.”     

Foreign aid,government behaviour,and fiscal policy in Papua New Guinea

The paper explores a number of long standing questions surrounding how foreign aid has influenced the fiscal behaviour of the PNG Government. This includes whether grant aid has encouraged the PNG government to be less fiscally responsible and accumulate higher levels of foreign debt; whether grant aid has tended to lower the PNG government's domestic revenue raising efforts; whether grant aid has drawn government expenditures away from key service delivery sectors; and whether budget support and project and program aid have had differential effects with respect to any of the foregoing questions. The analysis reveals several important insights regarding the interplay between foreign aid and public sector fiscal behaviour including evidence that grant aid has been an important source of debt reduction during this period. However, grant aid has tended to erode the domestic tax base, which has limited the government's ability to increase aggregate expenditure levels. Evidence is also found that suggests a significant portion of budget support was spent on key development sectors, although it also undermined domestic revenue collection. A number of policy implications follow.     

Public expenditure and revenue in China,1990-2009

This study examines the long-ran equilibrium relationship between government expenditure and government revenue in China from 1990 to2009, using co-integration techniques. Meanwhile, it examines the direction of causality relationship between the variables through Granger causalitytest. Empirical findings show that there is a long run equilibrium relationship between govenunent exponditure and revenue. Granger causality test indi-cate there is no hi-directional causal relationship between the two variables.     

Government Spending Patterns and the Real Exchange Rate in Sub‐Saharan Africa

Do government spending patterns and composition influence the behaviour of the real exchange rate in sub‐Saharan Africa (SSA)? First, we present a two‐sector small open economy model which proposes that government spending together with productivity differential leads to real exchange rate appreciation. Then, we take these propositions to SSA data and perform a coordinated empirical analysis. Interestingly, we find empirical support for the propositions in SSA. Finally, we disaggregate government spending into three components—consumption, investment and transfer payments—and check whether the composition of government spending provides any insight into the behaviour of the real exchange rate in SSA. Our results suggest that government composition does influence the real exchange rate in SSA. Specifically, we find that government consumption induces a real appreciation while government investment leads to a real depreciation. Although these findings yield appropriate magnitudes and signed directions, their effects are not always significant.     

Public Revenue‐Expenditure Nexus in South Africa: Are there Asymmetries?

This paper re‐examines the government revenue and expenditure relationship in South Africa using Enders and Siklos' Threshold adjustment and Granger causality tests. The paper allows for structural breaks in the unit root and cointegration tests. The results indicate the absence of any asymmetries in both the threshold autoregression and momentum threshold autoregression specifications of adjustments in the South African's budgeting process. The estimated symmetric error‐correction models provide support for the fiscal synchronization hypothesis of government revenues and expenditures for long‐run and short‐run dynamic equilibrium. These findings indicate that the South African fiscal authorities should try to maintain or even improve the control of their fiscal policy instruments to sustain the prudent budgetary process.     

Structural determinants of government budget deficits in developing countries

The purpose of this study is to examine the possibility that certain structural factors make some developing countries more likely to incur government budget deficits than others. Empirical evidence is provided to support the hypotheses that developing countries are likely to have larger government budget deficits the lower their level of economic development, the greater the degree of government participation in the economy, and the less control exercised over government expenditures. Less convincing support is given for the hypothesis that revenue instability contributes to government budget deficits. An unexpected result of the study is that growth of government revenues is positively related to budget deficits, which leads the author to consider the possibility of a ‘Please effect’.     

我国货币供应量、物价水平与经济增长之间关系的实证研究

针对我国2001～2010年季度数据,通过使用协整关系检验、格兰杰因果检验以及方差分解分析方法进行实证研究发现,长期内我国货币供给的变化与物价和产出的变化之间存在唯一的协整关系;同时存在一个单向的Granger因果关系:货币供给增长率是物价水平增长率的Granger原因,即长期内货币供应量仅对物价水平产生影响。最后根据实证分析结果对货币政策选择提出政策建议。     

Fiscal disequilibrium in developing countries

Fiscal equilibrium necessitates that ‘permanent’ government expenditures be covered by ‘permanent’ government revenues. The concept of ‘permanent’ goverment expenditures and revenues takes into account future revenue from capital investments as well as temporary windfalls. Hence, equilibrium may exist despite temporary imbalance between revenue and expenditure. The causes of disequilibrium can be classified into five categories: export boom; price-inelastic tax system; public enterprise performance; increased expenditure produced by political exigencies or administrative weaknesses; and worsening terms of trade. In practice, unrealistic customs valuations, specific as opposed to ad valorem taxes and administrative difficulties have been the most common sources of declining government revenue as a percentage of gross domestic product. Increased subsidies both to consumer goods and to public enterprises as well as inadequate control mechanisms have been the most frequent causes of rising government expenditure.     

Deviation from Purchasing Power Parity: Evidence from Malaysia, 1973–1997

This paper presents an empirical test of Purchasing Power Parity (PPP) applied to the Malaysia ringgit for the period from 1973 (CPI) and 1984 (WPI) to 1997. Consistent with other research findings, it is detected that real exchange rate follows a random walk. Using multivariate cointegration methodology for the long-run relationship between real exchange rate and certain macro-economic variables, the study provides evidence supporting a long-run relationship between the real exchange rate and the current account balance and government spending, the last two variables have been not included in previous studies of this economy. The causality test between real exchange rate with the current account balance and government spending, however, does not receive support from the error-correction model. This suggests that both government spending and current account balance are not adequate to explain the changes in ringgit real exchange rate. The puzzle still remains unsolved.     

Causality Links between Consumer and Producer Prices: Some Empirical Evidence

This paper reexamines the relationship between consumer and producer prices in the G7 countries (United States, Canada, Germany, France, Italy, United Kingdom, and Japan), and it improves on the existing literature in two ways. First, it takes into account causality links arising from the transmission mechanism of monetary policy, which are generally overlooked. Second, it employs the causality testing method for unstable systems recently introduced by Toda and Yamamato (1995), which results in standard asymptotics, thereby obtaining valid statistical inference. The empirical results are consistent with the conventional wisdom according to which there is unidirectional causality running from producer to consumer prices, bidirectional causality (or even no significant links) only being found when the causality links reflecting the monetary transmission mechanism are ignored.     

Analyzing the Dynamic Relationships between Physical Infrastructure,Financial Development and Economic Growth in India

This paper investigates the dynamic relationships between physical infrastructure, financial development and economic growth in the case of India, using the autoregressive distributed lag and the Toda–Yamamoto causality approach for the period 1980 to 2016. A physical infrastructure index and a financial development index are constructed using the principal component analysis. The empirical results suggest that physical infrastructure has a positive effect on economic growth both in the long run and short run, whereas financial development, although significant, has a weak impact on economic growth. The causality test supports a bidirectional causal relationship between infrastructure development and economic growth, while it finds unidirectional causation running from economic growth to financial development. As India is aiming for higher growth for a sustained period, our results suggest that there is a need for government intervention in expanding the physical infrastructure and this, in turn, could lead to economic growth as well as financial sector development.     

Tax rate,government revenue and economic performance: A perspective of Laffer curve

The Laffer curve illustrates a theoretical relationship between rates of taxation and the resulting levels of government revenue. This paper explores the relationship between tax rate (direct tax on labor income), government revenue and economic performance in a perspective of the Laffer curve by applying Computable General Equilibrium (CGE) model. The results show that the top of China's Laffer curve is about 40%. The government should consider changes in the entire taxation system and not just changes in direct taxes while increasing direct tax rate. If China wants to maximize tax revenues, the direct tax rate should be 35%. We conduct a variety of sensitivity analyses and conclude that the government tax peak is always 5–10% earlier than the apex of the Laffer curve. So, if a country has reached the top of the Laffer curve, this paper strongly recommends that tax cuts will have positive implications for the economy and government revenue.