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A Causality Test of the Revenue-Expenditure Nexus in Ghana

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  • Obeng, Samuel

Abstract

The paper investigates the revenue-expenditure nexus for Ghana. The study covers the period 1980-2013. It examines whether increases in government revenue cause increases in government expenditure or increases in government expenditure cause increases in government revenue. It also examines if changes in government expenditure and revenue have feedback effects on each other. The stationarity test indicates that both variables are stationary at the levels when the test is done with a constant and a trend, and are first difference stationary when the test is done with a constant but no trend. The paper analyses the long-run relationship between government expenditure and government revenue using the Ordinary Least Squares (OLS) method. The short-run relationships between the two variables are tested in a Vector Autoregressive (VAR) framework. The results show a very strong long-and short-run relationship between the variables. The second period lag of the revenue variable shows a negative relationship between government revenue and government expenditure. This indicates the possibility of the absence of Fiscal illusion in every two years of increased government expenditure. Granger causality test is done to determine the direction of the causal relationship between government expenditure and government revenue. The test gives a unidirectional causality running from revenue to expenditure. This implies government revenue causes government expenditure. Therefore, evidence of Tax-spend hypothesis is found. The implication is that, government must improve its revenue generation efforts in order for it to fund its ever increasing expenditure and to control the frequent fiscal slippages.

Suggested Citation

  • Obeng, Samuel, 2015. "A Causality Test of the Revenue-Expenditure Nexus in Ghana," MPRA Paper 63735, University Library of Munich, Germany, revised 25 Feb 2015.
    • Handle: RePEc:pra:mprapa:63735
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    Cited by:

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    3. Taner TURAN & Mesut KARAKAŞ, 2018. "The Relationship between Government Spending and Revenue: Nonlinear Bounds Testing Approach (NARDL)," Sosyoekonomi Journal, Sosyoekonomi Society.
    4. Ibrahim, Taofik, 2018. "Government expenditure-revenue nexus reconsidered for Nigeria: Does structural break matter?," MPRA Paper 86220, University Library of Munich, Germany, revised 21 Oct 2017.
    5. Yu kun Wang & Li Zhang & We-me Ho, 2020. "The Priority of Exploiting Fiscal Revenue or Lessening Public Expenditure: Evidence from China," Applied Finance and Accounting, Redfame publishing, vol. 6(1), pages 54-65, February.
    6. Maran Marimuthu & Hanana Khan & Romana Bangash, 2021. "Is the Fiscal Deficit of ASEAN Alarming? Evidence from Fiscal Deficit Consequences and Contribution towards Sustainable Economic Growth," Sustainability, MDPI, vol. 13(18), pages 1-19, September.
    7. Oyeyinka OMOSHORO-JONES, 2020. "Investigating The Government Revenue–Expenditure Nexus: Empirical Evidence For The Free State Province In A Multivariate Model," Theoretical and Practical Research in the Economic Fields, ASERS Publishing, vol. 11(2), pages 138-156.
    8. Khatibu Kazungu, 2019. "The Nexus between Government Expenditure and Revenue in Tanzania," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 7(4), pages 158-170, December.

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    More about this item

    Keywords

    Keywords: government revenue; government expenditure; OLS; VAR; Granger-causality;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H0 - Public Economics - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H59 - Public Economics - - National Government Expenditures and Related Policies - - - Other
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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