The Nexus between Government Expenditure and Revenue in Tanzania

Abstract

This study examines the long run relationship and the direction of causality between government revenue and government expenditure in Tanzania by using quarterly data spanning the period between 2000 and 2017. The study employed Augmented Dickey Fuller test, Johansen Cointegration, Unrestricted VAR model, Granger Causality test, Impulse Response Function and Variance Decomposition. In doing so, four hypotheses are subjected to empirical test, namely; tax-spend, spend-tax, fiscal synchronization, and fiscal neutrality. The results from both trace and maximum eigenvalue statistics clearly accept the null hypothesis that there is no cointegration between revenue and expenditure. Moreover, the Granger Causality test indicates that the direction of causality runs from government expenditure to government revenue, implying that government determines expenditure prior to its revenue. These results suggest that other three hypotheses are strongly rejected, corroborating spend-and tax hypothesis as postulated by Barro (1974), Peacock and Wiseman (1979) and Hondroyiannis and Papapetrou (1996).