Revenue and Expenditure Nexus: A Case Study of ECOWAS

Cosimo Magazzino

doi:10.5018/economics-ejournal.ja.2013-13

Abstract

Abstract This paper aims to assess the relationship among fiscal variables (government revenue and expenditure) in Sub-Saharan African countries. Using yearly data for the period between 1980 and 2011 in fifteen ECOWAS countries, a weak long-run relationship between government expenditure and revenue emerge, but only in the case of WAMZ countries. Granger causality analysis show mixed results for WAEMU countries, while for four out of six WAMZ countries (Gambia, Liberia, Nigeria, and Sierra Leone) the “tax-and-spend” hypothesis holds, since government revenue would drive the expenditure.

Highlights

The global financial crisis had a major impact on many African countries as a result, inter alia, of reduced commodity exports, the shrinking of domestic tax bases owing to a contraction of domestic output, and reduced remittances, leading to a deterioration of balance of payments positions
Roudet et al (2007) find that much of the long-run behaviour of real effective exchange rates in WAEMU countries can be explained by fluctuations in terms of trade, government consumption, investment, and productivity
CONCLUDING REMARKS AND POLICY IMPLICATIONS This study has used several panel econometric techniques in order to explore the relationship among public finance variables and economic growth in ECOWAS countries, in the period 1980-2011

Summary

Introduction

The global financial crisis had a major impact on many African countries as a result, inter alia, of reduced commodity exports, the shrinking of domestic tax bases owing to a contraction of domestic output, and reduced remittances, leading to a deterioration of balance of payments positions. One way to establish fiscal policy is to examine the relationship between revenue and expenditure in the framework of Granger causality. These empirical results provide an objective statistical basis to form empirical judgments about the correlations underlying fiscal variables (Doré and Nachega, 2000). The “tax-and-spend” hypothesis, due to Buchanan and Wagner (1977) and Friedman (1978), theorizes a causal relation running from revenue to spending. It views spending as adjusting, up or down, to whatever level can be supported by revenue. The fourth hypothesis indicates bidirectional causation between revenue and spending, if a feedback mechanism is established (Musgrave, 1966; Meltzer and Richard, 1981)

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Discussion

Conclusion