Government Revenues and Government Expenditures, or Fiscal Synchronization: Empirical Evidence from South and Eastern Asia

Abstract

To understand and solve budget deficit problems, some academics propose budgets cuts while some suggest increase in taxes. The purpose of this study is to check the causal relationship among ten countries from two regions, south and eastern Asia, where all countries are developing except, Japan. The relationship is tested among three fiscal variables for the period of twenty-seven years from 1980 to 2017. For analysis purposes, Augmented Dickey Fuller test, Toda and Yamamoto Granger Causality Test and Johnson co-integration tests has been used. The results reveal three co-integrating effects for, Bangladesh and Mongolia, two for India and Japan, one for Sri Lanka, Nepal, China, South Korea, North Korea, while non for Pakistan. The Toda and Yamamoto Granger causality tests reveal evidence of tax-and-spend hypothesis for China, Pakistan, and Nepal. For Nepal, we found support for spend-and-tax hypothesis. There is evidence of neutrality for Japan, South Korea, North Korea, Mongolia, India, Sri Lanka, and Bangladesh. The results validate that south and eastern Asian countries tax policies have lessor impact to reduce budget deficits and do not offer permanent solution for fiscal problems. Our findings support increase in taxes may be a good solution to budget deficit problem, but it can be reduced if revenues and expenditures are controlled simultaneously. Major policy implications include, raising tax rates in nations like China, Pakistan, and Nepal, to increase revenue and strengthen fiscal sustainability, the significance of government spending reduction as a key tactic for managing budget imbalances, the importance of balancing both revenue generation and expenditure and flexibility in approach and continual monitoring of fiscal indicators.