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The Causality between Taxes and Public Expenditure in Mauritius,1970-1999: A VECM Approach

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  • SOBHEE, S. K.

Abstract

While this paper tries to fill a particular niche in the literature on the tax and spend nexus of the public sector, it provides new insights on the causality between public expenditure and public revenue from a small island developing economy perspective. We apply the Johansen technique to uncover the dynamics characterising the public sector’s decision–making process with respect to taxing and spending. In particular, data covering the period 1970-1999 are used to test this causal link by applying a Vector Error Correction Mechanism (VECM). It is found that unidirectional causality runs from public revenue to public expenditure. This result, which is consistent both in the short run and the long run, implies that the government taxes first and then spends. Further, an important implication of our result is that the lack of evidence in favour of fiscal synchronization (bi-directional causality between tax and spend) would make it easier for the fiscal authority to dictate either its revenue or spending plans, hence making fiscal policy a stable and an effective tool for demand management in Mauritius.

Suggested Citation

  • Sobhee, S. K., 2004. "The Causality between Taxes and Public Expenditure in Mauritius,1970-1999: A VECM Approach," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 1(3), pages 115-130.
    • Handle: RePEc:eaa:ijaeqs:v:1:y2004:i:1_18
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    References listed on IDEAS

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    1. Hoover, Kevin D & Sheffrin, Steven M, 1992. "Causation, Spending, and Taxes: Sand in the Sandbox or Tax Collector for the Welfare State?," American Economic Review, American Economic Association, vol. 82(1), pages 225-248, March.
    2. Von Furstenberg, George M. & Green, R. Jeffery & Jeong, Jin-Ho, 1985. "Have Taxes Led Government Expenditures? The United States as a Test Case," Journal of Public Policy, Cambridge University Press, vol. 5(3), pages 321-348, August.
    3. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    4. Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May.
    5. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-190, March.
    6. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    7. S K Sobhee, 2003. "An Error Correction Model of the Median Voter?s Demand for Public Goods in Mauritius," Economic Issues Journal Articles, Economic Issues, vol. 8(2), pages 47-63, September.
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    Cited by:

    1. Yaya Keho, 2010. "Spending Cuts or Tax Adjustments: How Can UEMOA Countries Control Their Budget Deficits?," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 9(3), pages 233-252, December.

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    More about this item

    Keywords

    Macroeconomics of Public Finance; Macroeconomic Policy; National Budget; Deficit and Debt;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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