TESTING ALTERNATIVE VIEWS OF GOVERNMENT BUDGETING

Abstract

We develop three competing models of government budgeting: (1) a rational model, in which government services are provided in accordance with consumer tastes, (2) a Friedman‐type model, in which spending and borrowing decisions derive from the level of taxes, and (3) a Buchanan public‐choice type model, in which the extent of deficit spending determines government spending plans. We use quarterly U.S. data over the period 1947 to 1987 to empirically test each of these models within a vector autoregressive framework, taking into account the potential role of other relevant macro variables. We first specify the testing framework utilizing data on the levels of government revenue, spending and deficit, and show that the resulting estimates are unrealistic. We then divide each of these variables into anticipated and unanticipated components. The results thus obtained reject the Buchanan‐type models, but are unable to reject either a Friedman‐type model or a “weak” form of the rational model. Our results suggest that future research should concentrate on developing appropriate tests capable of distinguishing between these two models of the government budgeting process.