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Testing the Relationship Between Government Spending and Revenue: Evidence From GCC Countries

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  • Mr. Qing Wang
  • Mr. Ugo Fasano-Filho

Abstract

The paper examines the direction of causality between total government expenditure and revenue in oil-dependent GCC countries by utilizing a cointegration and error-correction modeling framework, and by calculating a variance decomposition analysis. In addition, it presents impulse responses to shed light on the dynamic relation of expenditure to a revenue shock. The results confirm expectations that government spending follows oil revenue, suggesting a pro-cyclical expenditure policy to variations in oil revenue. To make budget expenditure less driven by revenue availability, the authorities could resort to a medium-term expenditure framework, so that expenditures can be planned and insulated from volatile short-term revenue availability.

Suggested Citation

  • Mr. Qing Wang & Mr. Ugo Fasano-Filho, 2002. "Testing the Relationship Between Government Spending and Revenue: Evidence From GCC Countries," IMF Working Papers 2002/201, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2002/201
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    References listed on IDEAS

    as
    1. Mr. Ugo Fasano-Filho, 2000. "Review of the Experience with Oil Stabilization and Savings Funds in Selected Countries," IMF Working Papers 2000/112, International Monetary Fund.
    2. Mr. Rolando Ossowski & Mr. Steven A Barnett & Mr. James Daniel & Mr. Jeffrey M. Davis, 2001. "Stabilization and Savings Funds for Nonrenewable Resources," IMF Occasional Papers 2001/004, International Monetary Fund.
    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. Oluwole Owoye, 1995. "The causal relationship between taxes and expenditures in the G7 countries: cointegration and error-correction models," Applied Economics Letters, Taylor & Francis Journals, vol. 2(1), pages 19-22.
    5. Baffes, John & Shah, Anwar, 1994. "Causality and comovement between taxes and expenditures: Historical evidence from Argentina, Brazil, and Mexico," Journal of Development Economics, Elsevier, vol. 44(2), pages 311-331, August.
    6. Ahmad M. A. Ghamdi, 1991. "Revenue Fluctuations and Current and Development Expenditures in the GCC Countries," Development Policy Review, Overseas Development Institute, vol. 9(1), pages 29-36, March.
    7. James Payne, 1997. "The tax-spend debate: the case of Canada," Applied Economics Letters, Taylor & Francis Journals, vol. 4(6), pages 381-386.
    8. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
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