Dynamic Causal Relationship between Government Expenditures and Revenues in Indonesia

Abstract

This paper examines the causal relationship between government expenditure and revenues in Indonesia during the period 1963 to 2017 by using the Vector Auto Regression (VAR) model. The results show that there is a strong relation and it represents a bi-directional causality between expenditure and revenue. However, government expenditure and revenue relationship is negative and revenue is positively related to government expenditure. This supports Wagner's law related to fiscal policy in Indonesia from revenue to expenditure. The finding also shows that the longer expenditure does not have an impact on increasing revenue and it stimulates a greater gap in the fiscal deficit in Indonesia. In order to cover the fiscal deficit, Indonesian government policy really relies on loans. Keywords— Dynamic Causality, Government Expenditure; Revenues; Fiscal Policy; Vector autoregression