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Causal Link between Central Government Revenue and Expenditure: Evidence for India

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  • Yashobanta, Yashobanta Parida
  • smruti, Smruti Ranjan Behera
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    Abstract

    This paper attempts to analyze the causal relationship between central government revenue and expenditure for India using annual data over the period 1970-2008. The Johansen cointegration test suggests that there is a long-run relationship between central government revenue and expenditure. The result from Granger causality test based on Vector Error Correction Models (VECM) suggests bidirectional causality between central government revenues and expenditures in the long-run supporting Fiscal Synchronization hypothesis. Under this hypothesis, our finding indicates that the fiscal authority of India should try to raise revenue and cut expenditure simultaneously in order to control the respective fiscal deficit. The short-run Granger causality test based on WALD test restriction suggests unidirectional causality from expenditure to revenue supporting “Spend-and-Tax” hypothesis. This hypothesis suggests that the unsustainable fiscal imbalances can be mitigated by policies that adjusted government expenditure.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 43072.

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    Date of creation: 30 Oct 2012
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    Handle: RePEc:pra:mprapa:43072

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    Keywords: Revenue; Expenditure; Deficit; Causality; Cointegration;

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    1. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
    2. James Payne, 1997. "The tax-spend debate: the case of Canada," Applied Economics Letters, Taylor & Francis Journals, vol. 4(6), pages 381-386.
    3. Hondroyiannis, George & Papapetrou, Evangelia, 1996. " An Examination of the Causal Relationship between Government Spending and Revenue: A Cointegration Analysis," Public Choice, Springer, vol. 89(3-4), pages 363-74, December.
    4. Kevin D. Hoover & Steven M. Sheffrin, 1990. "Causation, spending and taxes: sand in the sandbox or tax collector for the welfare state?," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
    5. Bohn, Henning, 1991. "Budget balance through revenue or spending adjustments? : Some historical evidence for the United States," Journal of Monetary Economics, Elsevier, vol. 27(3), pages 333-359, June.
    6. David E. Bloom & David Canning & Jaypee Sevilla, 2001. "The Effect of Health on Economic Growth: Theory and Evidence," NBER Working Papers 8587, National Bureau of Economic Research, Inc.
    7. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, September.
    8. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
    9. Xiaoming Li, 2001. "Government revenue, government expenditure, and temporal causality: evidence from China," Applied Economics, Taylor & Francis Journals, vol. 33(4), pages 485-497.
    10. Henning Bohn, . "Budget Balance Through Revenue or Spending Adjustments ? Some Historical Evidence for the United States (Reprint 013)," Rodney L. White Center for Financial Research Working Papers 03-91, Wharton School Rodney L. White Center for Financial Research.
    11. von Furstenberg, George M & Green, R Jeffrey & Jeong, Jin-Ho, 1986. "Tax and Spend, or Spend and Tax?," The Review of Economics and Statistics, MIT Press, vol. 68(2), pages 179-88, May.
    12. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-27, October.
    13. Constantinos Katrakilidis, 1997. "Spending and revenues in Greece: new evidence from error correction modelling," Applied Economics Letters, Taylor & Francis Journals, vol. 4(6), pages 387-391.
    14. Provopoulos, George & Zambaras, Athanassios, 1991. " Testing for Causality between Government Spending and Taxation," Public Choice, Springer, vol. 68(1-3), pages 277-82, January.
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