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Causality Between Revenues and Expenditures and the Size of the Federal Budget

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  • Paul R. Blackley

    (Le Moyne College)

Abstract

Recent legislation has reduced federal tax rates and provided for indexation of the personal income tax against inflation. These changes are in part designed to reduce the relative size of government in the U.S. economy. Testing assump tions behind this proposition, this article examines the causal relation between revenue and expenditure changes in explainingfederal budget growth. Statistical causality tests reveal that revenue growth generally precedes expenditure growth, confirming that growth in revenue capacity stimulates budget expan sion rather than deficit reduction. A trivariate causal model including GNP, however, suggests that both demand and supply factors are responsible for the budget's growth.

Suggested Citation

  • Paul R. Blackley, 1986. "Causality Between Revenues and Expenditures and the Size of the Federal Budget," Public Finance Review, , vol. 14(2), pages 139-156, April.
    • Handle: RePEc:sae:pubfin:v:14:y:1986:i:2:p:139-156
    DOI: 10.1177/109114218601400202
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    References listed on IDEAS

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    4. Ward, Benjamin, 1982. "Taxes and the Size of Government," American Economic Review, American Economic Association, vol. 72(2), pages 346-350, May.
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    Cited by:

    1. Stöhlker, Daniel & Neumeier, Florian & Fuest, Clemens, 2018. "Tax Cuts Starve the Beast! Evidence from Germany," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181592, Verein für Socialpolitik / German Economic Association.
    2. Luis Gil-Alana, 2009. "Government Expenditures and Revenues: Evidence of Fractional Cointegration in an Asymmetric Modeling," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 15(2), pages 143-155, May.
    3. M. Haider Hussain, 2004. "On the Causal Relationship between Government Expenditure and Tax Revenue in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 9(2), pages 105-117, Jul-Dec.
    4. Francisco de Castro & José M. González-Páramo & Pablo Hernández de Cos, 2001. "Evaluating the dynamics of fiscal policy in Spain: patterns of interdependence and consistency of public expenditure and revenues," Working Papers 0103, Banco de España.
    5. repec:asi:ajoerj:2013:p:420-432 is not listed on IDEAS
    6. Narayan, Paresh Kumar, 2005. "The government revenue and government expenditure nexus: empirical evidence from nine Asian countries," Journal of Asian Economics, Elsevier, vol. 15(6), pages 1203-1216, January.
    7. Mohsen Mehrara & Abbas Ali Rezaei, 2014. "The Relationship between Government Revenue and Government Expenditure in Iran," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 4(3), pages 171-182, March.
    8. Nemanja Lojanica, 2015. "Government Expenditure and Government Revenue: The Causality on the Example of the Republic of Serbia," MIC 2015: Managing Sustainable Growth; Proceedings of the Joint International Conference, Portorož, Slovenia, 28–30 May 2015,, University of Primorska, Faculty of Management Koper.
    9. A. Phiri, 2019. "Asymmetries in the revenue–expenditure nexus: new evidence from South Africa," Empirical Economics, Springer, vol. 56(5), pages 1515-1547, May.
    10. Michael Marlow & Neela Manage, 1988. "Expenditures and receipts in state and local government finances: Reply," Public Choice, Springer, vol. 59(3), pages 287-290, December.
    11. 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.
    12. Mr. Jean-Claude Nachega & Mr. Ousmane Dore, 2000. "Budgetary Convergence in the WEAMU: Adjustment Through Revenue or Expenditure?," IMF Working Papers 2000/109, International Monetary Fund.
    13. Ayinde, Kayode & Bello, Aliyu A. & Ayinde, Opeyemi Eyitayo, 2013. "Modeling Nigerian Government Revenues and Total Expenditure: An Error Correction Model Approach," 2013 Fourth International Conference, September 22-25, 2013, Hammamet, Tunisia 160483, African Association of Agricultural Economists (AAAE).
    14. Kayode Ayinde & Aliyu A. Bello & Opeyemi E. Ayinde & Damilola. B. Adekanmbi, 2015. "Modeling Nigerian Government Revenues and Total Expenditure: Combined Estimators’ Analysis and Error Correction Model Approach," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 7(1), pages 1-14, March.
    15. Michael Marlow & William Orzechowski, 1988. "Controlling leviathan through tax reduction," Public Choice, Springer, vol. 58(3), pages 237-245, September.
    16. M. Haider Hussain, 2005. "On the Causal Relationship between Government Expenditure and Tax Revenue in Pakistan," Macroeconomics 0509014, University Library of Munich, Germany.
    17. Abdur Chowdhury, 1988. "Expenditures and receipts in state and local government finances: Comment," Public Choice, Springer, vol. 59(3), pages 277-285, December.
    18. 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.
    19. James Payne, 1997. "The tax-spend debate: the case of Canada," Applied Economics Letters, Taylor & Francis Journals, vol. 4(6), pages 381-386.
    20. Paul Alagidede & George Tweneboah, 2015. "On the Sustainability and Synchronization of Fiscal Policy in Latin America," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 52(2), pages 213-240, November.
    21. Takumah, Wisdom, 2014. "The Dynamic Causal Relationship between Government Revenue and Government Expenditure Nexus in Ghana," MPRA Paper 58579, University Library of Munich, Germany.

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