Government revenue and government expenditure nexus: evidence from developing countries

Abstract

The relationship between government revenue and government expenditure has attracted a lot of interest given its policy relevance, particularly with respect to budget deficits. The goal of this paper is to investigate evidence for causality between government revenue and government expenditure within a multivariate framework by modelling them together with gross domestic product for 12 developing countries. Our application of the Toda and Yamamoto (1995) test for Granger causality reveals support for the tax-and-spend hypothesis for Mauritius, El Salvador, Haiti, Chile and Venezuela. For Haiti, there is evidence for the spend-and-tax hypothesis, while for Peru, South Africa, Guatemala, Uruguay and Ecuador there is evidence of neutrality.

Acknowledgements

We would like to thank Professor Mark Taylor and a referee of this journal for helpful comments and suggestions on earlier versions of this paper.

Notes

¹ Payne (1997), to the best of our knowledge, is the only study that models government revenue and government expenditure together with GDP.

² The Im et al. (2003) panel unit root test was also undertaken for the 3 series. We found that all the three variables were non-stationary at the 10 per cent level or better. Detailed results are available from the authors upon request.