The causal and cointegration relationship between government revenue and government expenditure: a case of South Africa from 1980 2015

Abstract

Government is an important institution in every country because it can assist in stabilising the economy by implementing proper economic policies. One of these policies is the fiscal policy that consists of government revenue and government expenditure. When government expenditure exceeds government revenue this causes a budget deficit to be realised. However, it is in understanding the direction of causality between government revenue and government expenditure that has a major impact on the budget deficit. Therefore, the main objective of this study was to determine the causal relationship that exists between government revenue and government expenditure in South Africa. The study employed annual time series data from the year 1980 to 2015 taken from the South African Reserve Bank. The Johansen multivariate method was employed to test for cointegration and the Vector Error Correction/Granger causality test was employed to test for causality. The empirical results found suggest that there is a long run relationship between government revenue and government expenditure. Findings from the causality test suggest that in the short run there is no evidence of causality between government revenue and government expenditure in South Africa. Thus, policy makers in the short run should determine government revenue and government expenditure of South Africa independently in an attempt to reducing the budget deficit.