The purpose of this paper is to empirically analyse the revenue-expenditure models of public
finance by considering the possibility of non-linear and asymmetric adjustment. A long-run
relationship between general government expenditure and revenues is identified for Italy.
Following system-wide shocks, the estimated relationship adjusts slowly to equilibrium,
mainly due to complex administrative procedures that add to the sluggishness of tax
collection and undermine the effective monitoring of public spending. Exogeneity of public
expenditure implies that taxes rather than spending, carry the burden of short-run adjustment
to correct budgetary disequilibria. Allowing for non-linear adjustment and the possibility of
multiple equilibria, our findings show evidence of asymmetric adjustment around a unique
equilibrium. In particular, we find that when government expenditure is too high, adjustment
of taxes takes places at a faster rate than when it is too low. Further, there is evidence of a faster
adjustment when deviations from the equilibrium level get larger, pointing to a Leviathan-style,
revenue-maximiser government
