Dynamic Nexus between Government Revenues and Expenditures in Nigeria: Evidence from Asymmetric Causality and Cointegration Methods

Abstract

The incessant fiscal deficit being experienced in different countries across the world has raised concerns about the ability of government to properly manage its revenues and expenditures. This has necessitated a flurry of studies on the relationship between government revenues and government expenditures over time. However, empirical evidence appears to be mixed, even within a country, depending on the methodological approaches adopted by each researcher. In the light of this, this study examines the asymmetric causality and cointegration between revenues and expenditures using aggregated and disaggregated data. The results of linear causality tests of Granger (1969) and Toda-Yamamoto (1995) support fiscal synchronisation hypothesis while those of nonlinear causality test of Diks and Panchenko (2006) support revenue-spending hypothesis. The results further show the existence of asymmetric cointegration between revenues and expenditures in the short-run and the long-run. The final results obtained from the decomposition of revenues into the positive and negative components show that positive change in revenues has a positive effect on expenditures and vice versa for a negative change in revenues. Based on these findings, the panacea proposed to over-reliance in revenues, particularly oil revenues as a determinant of government expenditures, is the proper management of oil revenues and other sources of revenues. The government would also need to diversify the economy so that more revenues could be available to it from other sources to finance its expenditures