A Note on the Relation between Government Expenditure and Receipts in Italy: A Quarterly Analysis

Abstract

A precise knowledge of the relation between government expenditure and revenues may be useful to control budget deficits because, if there is interdependence, raising taxes to reduce deficits may lead directly to more spending. An effective manipulation of central government spending and tax revenues requires information on the direction of causality between these economic variables. The purpose of this paper is to investigate the relationship between government expenditure and receipts based on quarterly data, using the structural cointegration approach of Pesaran and Pesaran [1997]. In the results presented below, the structural cointegration approach provides evidence of a long and short-run equilibrium between government spending and receipts, supporting the assumption that the Italian Government’s expenditure is a sort of automatic stabiliser as opposed to Wagner’s Law.