The causal relationship between taxes and expenditures in the G7 countries: cointegration and error-correction models

Abstract

The paper examines the causal relationship between tax revenues and expenditures in the G7 countries using cointegration and error-correction methodology. This statistical technique provides additional channels through which causality could emerge. The empirical results show that bidirectional causality exists between government taxes and expenditures in all countries except in Japan and Italy. For Japan and Italy, causality runs from government taxes to expenditures.