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The Causality between Taxes and Public Expenditure in Mauritius,1970-1999: A VECM Approach

  • SOBHEE, S. K.
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    While this paper tries to fill a particular niche in the literature on the tax and spend nexus of the public sector, it provides new insights on the causality between public expenditure and public revenue from a small island developing economy perspective. We apply the Johansen technique to uncover the dynamics characterising the public sector’s decision–making process with respect to taxing and spending. In particular, data covering the period 1970-1999 are used to test this causal link by applying a Vector Error Correction Mechanism (VECM). It is found that unidirectional causality runs from public revenue to public expenditure. This result, which is consistent both in the short run and the long run, implies that the government taxes first and then spends. Further, an important implication of our result is that the lack of evidence in favour of fiscal synchronization (bi-directional causality between tax and spend) would make it easier for the fiscal authority to dictate either its revenue or spending plans, hence making fiscal policy a stable and an effective tool for demand management in Mauritius.

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    Article provided by Euro-American Association of Economic Development in its journal International Journal of Applied Econometrics and Quantitative Studies .

    Volume (Year): 1 (2004)
    Issue (Month): 3 ()
    Pages: 115-130

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    Handle: RePEc:eaa:ijaeqs:v:1:y2004:i:1_18
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    1. 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 1057-72, June.
    2. Hoover, Kevin D & Sheffrin, Steven M, 1992. "Causation, Spending, and Taxes: Sand in the Sandbox or Tax Collector for the Welfare State?," American Economic Review, American Economic Association, vol. 82(1), pages 225-48, March.
    3. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-90, March.
    4. S K Sobhee, 2003. "An Error Correction Model of the Median Voter?s Demand for Public Goods in Mauritius," Economic Issues Journal Articles, Economic Issues, vol. 8(2), pages 47-63, September.
    5. 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.
    6. Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May.
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