Abstract
The main purpose of the study is to investigate the short run and long run relationship between government revenues and government expenditures in Bahrain over the period from 1990 to 2017. Using annual data and time series analysis, the study indicated that the above two variables, government revenues and government expenditures were integrated of order one when both Augmented Dickey-Fuller (ADF) and Phillip-Perron (PP) unit root tests were applied. The empirical results have revealed that unidirectional causality runs from government revenues to government expenditures. Thus, there is evidence in support of “revenue-spend” hypothesis. Finally, the results revealed that a 1% increase in oil revenue induces an increase in government expenditures by 1.37%. Therefore, policymakers in Bahrain should focus to further diversify the sources of government revenues from non-oil sectors in such a way that the country will be immune to vulnerability, especially when world oil market performs poorly.Keywords: Oil revenues, Cointegration, Government expenditures, Government revenues, Granger causality, Bahrain.JEL Classifications: E62, H20, H30, C30, C40, C51DOI: https://doi.org/10.32479/ijeep.6991
Highlights
Economic development and social goals can be achieved and promoted by adopting the state budget that directs the government expenditures towards the development of infrastructure, promotion of education, healthcare and other economic and social activities for improve public wellbeing and standard of living
The current study attempts to investigate the relationship between government expenditures and government revenues in the Kingdom of Bahrain over the fiscal years 1990/1991–2017/2018 by using time series analysis and the technique of error correction model (ECM) and Engle and Granger causality tests
Both unit root tests by employing augmented dickey-fuller (ADF) and PP revealed that both variables are I (1)
Summary
Economic development and social goals can be achieved and promoted by adopting the state budget that directs the government expenditures towards the development of infrastructure, promotion of education, healthcare and other economic and social activities for improve public wellbeing and standard of living. The government revenues are the most important sources of financing the public expenditures for both developed and developing countries through public budget. The first hypothesis states that causality runs from government revenues to government expenditures (Friedman, 1978; Buchanan and Wagner, 1978). The third hypothesis implies that there is bi-directional causality between government revenues and government expenditures, which means that government revenues decisions are not made in isolation from government expenditures decisions (Meltzer and Richard, 1981; Musgrave, 1966; Chang and Chiang, 2009). The fourth hypothesis indicates that there is no causality between government revenues and government expenditures; revenues and expenditures are independent decisions (Baghestani and McNown, 1994)
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