Government Tax Revenue, Expenditure and Causality: the Experience of India

The objective of the study is to analyse the dynamics of causal relationship between revenue and expenditure. Although a number of studies have shed light on this issue using Granger-Sims causality tests, the present study attempts to quantify various feedback between revenue and expenditure, along the lines suggested by Geweke and then the results are compared with Granger's causality test. The results showed the absence of co-integration between Government tax revenue and expenditure variables implying no evidence of a stable long run relationship between them. Geweke's test provided different inferences for the causal relationship between TR and GE. In the mdel with TR as the dependent variable, Geweke's test indicated the existence of bi-directional causality, while in the case of the model with GE as dependent variable, Geweke's test showed the absence of any causal relationship between the variables. The Granger's test suggests the uni-directional causality flowing from government expenditure to revenue. To conclude, the causal inferences were found to be sensitive to the specification of the model.