Revisiting the Government Revenue-Expenditure Nexus: Evidence from Nigeria Based on the VAR Granger Causality Approach

Abstract

The relationship between government revenue and government expenditure is important, given its relevance for policy especially with respect to the budget deficit. The purpose of this study is to examine the structure of federal government revenue and expenditure in Nigeria, from 1961-2010. It investigates the causal relationship between government revenue and government expenditure, using Granger causality test through cointegrated vector autoregression (VAR) methods; so as to determine whether the tax-spend hypothesis, spend-tax hypothesis, fiscal synchronization hypothesis, or the fiscal neutrality hypothesis hold in the relationship between government revenue and expenditure for Nigeria. The result shows that there is a bi-directional causality between government revenue and government expenditure. The outcome of the bi-directional causality between government revenue and expenditure supports the fiscal synchronization hypothesis. This therefore, suggest that the federal government should not make spending-tax decisions in isolation of tax-spend decisions. This is because the joint determination of revenues and expenditures is appealing as long as it effectively restrains the budget deficit. Therefore, efforts at enhancing sources of revenue should be accompanied by reductions in government spending for Nigeria.