Testing the Inter-Temporal Relationship between Government Spending and Revenue: Evidence from Sri Lanka
In order to achieve and sustain fiscal discipline, a proper understanding about the budgetary movements and causal relationship between government revenue and government expenditure have become a vital requirement. Therefore, this paper examines the causal relationship between government expenditure and government revenue in Sri Lanka for the period of 1960-2013. In the process of achieving the main objective, the study uses annual data of government revenue, government expenditure and GDP deflator, and utilizes cointegration and error correction modeling framework, and Granger causality tests. In addition, it presents impulse responses to shed light on the dynamic relation of revenue to a expenditure shock. The results confirm spending-revenue hypothesis both in short run and long run. Considering the above empirical findings the study suggests that, in order to achieve and sustain fiscal discipline, Sri Lankan government should adopt selective expenditure framework.
