Advances in Economics and Business Vol. 5(1), pp. 33 - 40
DOI: 10.13189/aeb.2017.050105
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Cointegration between Government Expenditure and Revenue: Evidence from India


Asit Ranjan Mohanty 1,*, Bibhuti Ranjan Mishra 2
1 Faculty of Accounting and Finance, Xavier Institute of Management, Xavier University, India
2 Centre of Excellence in Fiscal Policy and Taxation (CEFT), Xavier Institute of Management, Xavier University, India

ABSTRACT

The study examines the nexus between tax revenue of the government and public expenditure in India using Johensen-Juselius cointegration Methodology during 1980-81 to 2013-14. It tests four hypotheses relating to the revenue-expenditure nexus, i.e. tax-spend hypothesis, spend-tax hypothesis, fiscal synchronization hypothesis and institutional separation hypothesis. The nexus is studied at centre, state and combined level. The study establishes one cointegrating relationship between public expenditure and tax revenue which suggests a long-run relationship between the two. The results of the Vector Error Correction Models evince that there is one-way causality running from tax revenue to expenditure both in short-run as well as in the long-run. This result justifies the operation of tax-spend hypothesis. The reverse-causality is not found in the analysis either for short or long-run.

KEYWORDS
Tax Revenue, Expenditure, Johensen-Juselius Cointegration, Vector Error Correction Models, Granger Causality Test

Cite this paper
Asit Ranjan Mohanty , Bibhuti Ranjan Mishra . "Cointegration between Government Expenditure and Revenue: Evidence from India." Advances in Economics and Business 5.1 (2017) 33 - 40. doi: 10.13189/aeb.2017.050105.