Turkish budget deficit sustainability and the revenue-expenditure nexus

Abstract

The sustainability of the Turkish budget deficits as well as the dynamics of government revenues and expenditures in controlling the size of the deficit is examined using annual data from 1968 to 2004. The findings support the existence of a long-run relation between government revenues and expenditures once allowance is made for an unknown structural break. However, the size of the slope parameter is significantly less than one, suggesting that the government might face difficulties in financing its future debt. With respect to the revenue-expenditure nexus, the empirical evidence is favourable to the tax-spend hypothesis through the error correction term in the expenditures equation. Finally, there is no evidence of asymmetries in the adjustment process in either the threshhold autoregressive or momentum threshold autoregressive specifications of the budgetary adjustment process.

Notes

¹A number of earlier studies have examined the sustainability of budget deficits in Turkey. Akcay et al . (2001) provide evidence questioning budget deficit sustainability while Gunaydin (2003) provides evidence to suggest ‘weak’ sustainability. Unlike these studies, this article examines budget deficit sustainability allowing for a growing economy by scaling government expenditures and revenues by GNP.

²Payne (2003) provides an international survey of the literature.

³The ‘strong’ form of sustainability requires (1) the government revenues and expenditures are cointegrated, and (2) the cointegrating parameter equals one (Quintos, 1995; Martin, 2000; Cunado et al ., 2004). This is also equivalent to the existence of a stationary process in the budget deficit.

⁴The number of auxiliary regressors in the ADF* tests was chosen using the Akaike information criterion.

⁵DOLS is the dynamic OLS regression of R_t on a constant, the dummy variable, D where D=1.0 for t>1983 and 0.0 otherwise, G_t , ΔG_{t −1}, ΔG_{t −2}, ΔG_{t +1} and ΔG_{t +2}.

⁶Incidentally, the break in 1983 corresponds to the general elections in which the military government ceded its power to a civilian government. Moreover, 1983 also marked the implementation of significant trade liberalization policies (Onis, 2000).

⁷Note the is the lagged residual from the cointegrating Equation 4. implies a budget surplus at time t−1. Thus, in order to move towards long-run equilibrium, ΔR_t must respond negatively to , i.e., δ<0. In contrast, ΔG_t should respond positively to a budget surplus, implying that >0.

⁸See Ewing et al . (2006) of various explanations for asymmetric adjustment in the budgetary process.