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

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  • Omoshoro-Jones, Oyeyinka Sunday

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.

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  • Omoshoro-Jones, Oyeyinka Sunday, 2020. "Investigating the Government Revenue–Expenditure Nexus: Empirical Evidence for the Free State Province in a Multivariate Model," MPRA Paper 101349, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:101349
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    More about this item

    Keywords

    VECM; Expenditure; Revenue; Causality; Cointegration; Free State province.;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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