Tax-Spend, Spend-Tax or Fiscal Synchronization Hypothesis: Evidence from Iran

Abstract

The relationship between revenue and government expenditure is an important subject in public economics especially for Iran country, which is suffering from persistent budget deficits. From point of view of theoretical studies, there are essentially four schools of thought on the direction of causation between government expenditure and revenue. The main purpose of this study is to investigate the Long and short Run relationship between government revenue and government expenditure in Iran Country covering data 1978- 2012 with using An Auto Regressive Distributive Lag (ARDL) Approach. The Iranian economy has been subject to a multitude of structural changes and regime shifts during the sample period. First, time series properties of the data are first analysed by Augmented Dickey-Fuller (ADF), Zivot-Andrews and Lee – Strazicich (2003, 2004) model. The results of the ADF and Lee – Strazicich models indicate that all series under investigation are non-stationary at level. However, it is evident from the results of Augmented Dickey-Fuller and Lee – Strazicich tests that revenue and government expenditure are stationary at first difference because null hypotheses of unit roots for all the variables are rejected at 1 percent significance level then, we investigated causality between revenue and government expenditure by using an application of Toda-Yamamoto approach. Their evidence generally found unidirectional causality running from government revenue to government expenditure. So, these results consistent with the revenue-spend hypothesis. In the three stage, Autoregressive Distributeded Lag (ARDL) technique is used to describe both long run relationships and short run dynamic adjustments between government revenue and expenditure variables. The results of this paper support the Freidman (1978) hypothesis that government revenues cause expenditure and revenues have a positive causal impact on government expenditure.