The tax–spending nexus: evidence from Romania using wavelet analysis

Abstract

This article investigates the relationship between government revenue and expenditure in Romania between 1991 and 2015 using the wavelet approach. The article presents detailed information for different sub-periods and frequencies, emphasising the lead–lag nexus between variables under cyclical and anti-cyclical shocks. The main findings show that using individual taxation techniques under structural reforms should control short-term budget deficits. Separately, when an economic crisis arises, expenditure adjustment is a more appropriate fiscal instrument. In the medium and long term, the taxation system for individuals is recommended to be used to control for budgetary deficits during crisis. At the same time, in the medium term, government expenditures also represent a suitable policy choice.

Keywords:

• Government
• revenue
• expenditure
• Romania
• wavelet analysis

Acknowledgements

The author thanks Jean-Christophe Pereau, Marc-Alexandre Senegas, Eugen Ursu, Rouillon Sébastien and Ron Davies for their comments and suggestions offered for improving this research. Special thanks go to Richard Connolly, Scott Hegerty and Mihaela Stan.

Notes

1. For all wavelet estimations, the R-codes proposed by Rösch and Schmidbauer (2014), in ‘WaveletComp: A guided tour through the R-package’ are used.