Investigating the Government Revenue–Expenditure Nexus: Empirical Evidence for the Free State Province in a Multivariate Model

Oyeyinka Omoshoro-Jones

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines the government revenue–expenditure nexus for the Free State Province in a multivariate modelling framework using real GDP and inflation as control variables over the period 2004Q2–2018Q1. Cointegration and intertemporal (causal) links among variables were established employing Johansen-Juselius (1990) within a vector error correction model (VECM) and Toda-Yamamoto (1995) non-Granger causality test. Cointegration analysis affirms the existence of a long-run relationship between variables. The results of the causal analyses show a bidirectional causality between government revenues and expenditures in both the long-run and short-run, supporting the fiscal synchronization hypothesis. Real GDP and inflation individually Granger-causes government revenues in both the long-run and short-run, stressing their importance on generating revenue. Based on these findings, an isolated fiscal measure to raise tax-revenues or cut expenditure will exacerbate fiscal imbalance. The Free State government through its provincial treasury should adhere to a planned budget process, devise innovative revenue-generating strategies to circumvent the burden of producing inflation revenue, and effectively use its autonomy on fiscal instruments to maintain a sustainable fiscal policy path and stimulate economic activity level.

Keywords: VECM; Expenditure; Revenue; Causality; Cointegration; Free State province. (search for similar items in EconPapers)
JEL-codes: C5 C54 E00 E61 E62 (search for similar items in EconPapers)
Date: 2020-03-27
New Economics Papers: this item is included in nep-mac
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