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Which type of government revenue leads government expenditure?

Author

Listed:
  • Abdi, Zeinab
  • Masih, Mansur

Abstract

This Malaysia is a developing Islamic state that faced government budget deficit since 1998. It is undeniable that a budget deficit or inability to cover government spending is not positively seen by external parties. The optimum level of government budget is the state where government spending is totally offset by government revenue and that can be achieved through an increase in tax revenue or decrease in spending. The paper aims to discover the existence of a theoretical relationship between government spending and the different types of government revenues namely direct and indirect taxes and non-tax revenues. Furthermore, the paper tries to find out which of the different government revenues leads government spending. As well as to discover each revenue structure relationship with government spending using sample data from Malaysia for the period of 1970-2013 and time series techniques. The paper found out that although majority of government revenue is from direct tax revenue, the government spending only varies due to a change in indirect government tax revenue and non-tax revenue. In addition, it discovered that there is a long run relationship between the variables and that direct tax and government spending are endogenous (follower) variables, while non-tax revenue and indirect tax are exogenous (leader) variables. The paper also discussed the necessity of tax reform in Malaysia, since inefficiency in direct tax revenue leads to a dependence on non-tax revenue and regressive indirect taxes.

Suggested Citation

  • Abdi, Zeinab & Masih, Mansur, 2014. "Which type of government revenue leads government expenditure?," MPRA Paper 62367, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:62367
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    References listed on IDEAS

    as
    1. 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.
    2. Xiaoming Li, 2001. "Government revenue, government expenditure, and temporal causality: evidence from China," Applied Economics, Taylor & Francis Journals, vol. 33(4), pages 485-497.
    3. Paresh Kumar Narayan & Seema Narayan, 2006. "Government revenue and government expenditure nexus: evidence from developing countries," Applied Economics, Taylor & Francis Journals, vol. 38(3), pages 285-291.
    4. Debi Konukcu-Önal & Ayse Nil Tosun, 2008. "Government Revenue-Expenditure Nexus: Evidence From Several Transitional Economies," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 53(178-179), pages 145-156, July - De.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Government revenue; government expenditure; time series techniques;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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