Evaluation of Revenue and Expenditure Hypotheses: Evidence from Pakistan (1972-2015) Using EViews Software
Journal Title: Journal of Computing and Management Studies (JCMS) - Year 2018, Vol 2, Issue 1
Abstract
In the field of public finance economics, the potential links between government revenue and government expenditure is still an unsettled issue. Due to increased budget deficits and defaults in many developed and developing countries, it has intensely attracted the attention of policy analysts, theorists and politicians. On a theoretical front, four major hypotheses have resulted about the inter-temporal association between taxation (revenue) and spending. The first hypothesis proposed by Friedman (1978) and Buchanan and Wagner (1978) is the tax-spend hypothesis (where there is a unidirectional causality from tax to expenditure); the spend-tax hypothesis proposed by Peacock and Wiseman (1961), (where there is a unidirectional causality running from spend to tax); the fiscal synchronization hypothesis (where there is bidirectional causality and decisions are made concurrently)(Meltzer & Richard, 1981; Musgrave, 1966), and the institutional separation hypothesis or fiscal neutrality introduced by Beghestani and McNown (1994) relates that there is no connection between government revenue and expenditure such that no causal relation between revenue and spending is to be expected. This paper aims to investigate the causal relationship between government revenue and government expenditure of Pakistan, using time series data from 1972 to 2015. To forecast empirical and dynamic impact of random disturbances on the systems of variables, five steps VAR technique has been used. After testing empirical results shows no relationship between government revenue and expenditure, providing evidence of institutional separation in Pakistan. The study suggests that government should take expenditure and revenues decisions separately and target long run economic growth.
Authors and Affiliations
Muhammad Baqir Ali, Amjad Amin
Keywords
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