Impact of Tax Revenue on Government Expenditure in Ethiopia; OLS Method

Abstract

Factually, public expenditure has noted a nonstop uptrend over time in developing country. However, traditional thinking and philosophy did not favor the growth of public expenditure. Instead, it well thought-out market mechanism as a better guide in working of the economy and allocation of its resources. The empathy of the revenue-expenditure connection is vital to govern the correct course of action for fiscal discipline and fiscal policy. Basically the main objective of this study was to understand the impact of tax revenue on government expenditure in Ethiopia from the period of 1974/75 to 2019/20. In order to achieve the objective of this study a researcher used world development index and national bank of Ethiopia as a main data source. To found the impact of tax revenue on government expenditure the study employed Augmented Dickey Fuller, ordinary least square and pairwise granger causality test. For Ethiopia economy the result proved tax revenue and the previous expenditure has positive impact on government expenditure. The pairwise granger causality test also strength as there is causality which runs from tax revenue to government expenditure. The result of this study has been proved the first revenue-spent (tax-spent) hypothesis. The study recommends that the government should increase tax base and practice proper administration of tax system and generate inordinate revenue. In somehow, it is used as a means to cover excess expenditure and to reduce budget deficit. Moreover, in Ethiopia from time to time there is population growth, increasing urbanization, provision of social overheads, maintenance of order and law, welfare activities, projects and provision of public goods and utility service. So, the previous started activates needs more expenditure to sustain them currently. This may lead to budget deficit but the government should balance its expenditure and revenue, plus to this the government should accomplished activities which started previously without dalliance, this help the government to minimize the current expenditure in somehow, and can save the country from sustainable budget deficit. Reduce spent for cosmetic activates which have no more return. Keywords: Ethiopia, Impact, Tax, Expenditure, OLS DOI: 10.7176/JESD/10-13-06 Publication date: July 31 st 2020