You are here

Budget Deficit Sustainability and Revenue Expenditure Linkages in Major South Asian Economies

Journal Name:

Publication Year:

DOI: 
https://doi.org/10.17015/ejbe.2017.019.03
Abstract (2. Language): 
The paper examines sustainability of budget deficits and dynamic linkages between government revenues and expenditures in five major South Asian economies, namely India, Pakistan, Bangladesh, Srilanka and Nepal for period 1985-2014. The study contributes to the literature by combining individual-country analysis with recent panel data approaches for robustness of results. Our results support existence of long-run relationship between government revenues and expenditures for the countries in a specification allowing for unknown structural break. The size of slope parameter obtained from Dynamic Ordinary Least Squares is however significantly less than one except for Bangladesh indicating incoherence with ‘strong’ sustainability of deficits. The long run causality analysis lends support to ‘spend-tax hypothesis’ for India, Bangladesh, Pakistan and Srilanka and ‘tax- spend hypothesis’ in case of Nepal. From perspective of design of fiscal consolidation programmes, this implies that adjustment of revenues would be optimal solution to control spending in Nepal while control of expenditure would be effective in case of India, Bangladesh, Pakistan and Srilanka. The results from Pedroni (1999) and Westerlund (2007) panel cointegration tests and block exogeniety and Dumitrescu-Hurlin (2012) panel causality tests are broadly in conformity with the time series results.
37
59

JEL Codes:

REFERENCES

References: 

Bourke, P. (1989). Concentration and other determinants of bank profitability in Europe,
North America and Australia. Journal of Banking & Finance, 13(1), 65-79.
http://dx.doi.org/10.1016/0378-4266(89)90020-4.
Adedeji,O.S., & Thornton, J. (2010). Fiscal sustainability in a panel of Asian countries. Applied
Economics Letters, 17(7), 711-715.doi: 10.1080/13504850802297871
Afonso, A. (2005). Fiscal sustainability: The unpleasant European case. FinanzArchiv,61(1),
19- 44. doi: 10.1628/0015221053722532
Afonso, A., & Rault, C. (2007). What do we really know about fiscal sustainability in the EU?’.
ECB working paper.
Afonso, A., & Rault, C. (2013). Multi-step analysis of public finances sustainability. Retrieved
on June 16, 2015, from: http://www.eea-esem.com/files/papers/eeaesem/
2013/1048/Rault-paper2.pdf
Afonso, A.,& Jalles, J.T.(2011). A longer run perspective on fiscal sustainability. Empirica,
41(4), 821-847.
Alagidede, P., & Tweneboah, G. (2015). On the sustainability and synchronization of fiscal
policy in Latin America. Latin American Journal of Economics, 52(2), 213-240.
Al-Zeaud, H. A. (2015). The causal relationship between government revenue and
expenditure in Jordan. International Journal of Management and Business Research, 5(2),
117-127.
Anderson, W., Wallace, M.S., & Warner, J.T.(1986). Government spending and taxation:
What causes what? Southern Economic Journal, 52(3), 630-639.
Aristovnik, A. (2008). Fiscal sustainability in the Mediterranean region - a comparison
between the EU and non-EU member states. Romanian Journal of Economic Forecasting, 9(
4),161-173.
Baglioni, A., & Cherubini U. (1994). Intertemporal budget constraint and public debt
sustainability: The case of Italy. Applied Economics, 25(2), 275-283.
Barnhill,T.M., & Kopits,G.(2003). Assessing fiscal sustainability under uncertainity. IMF
Working Paper.
Barro, R. (1979). On the determination of the public debt. Journal of Political Economy,
87(5), 940–971.
Barua, S. (2005). An examination of revenue and expenditure causality in Bangladesh: 1974-
2004. Bangladesh Bank working paper.
Blanchard, O., Chouraqui, J.-C., Hagemann, R.P., & Sartor, N. (1990).The Sustainability of
fiscal policy: New answers to an old question. OECD Economic Studies,15, 7-36.
Bohn, H. (1991). Budget balance through revenue or spending adjustments: Some historical
evidence for the United States. Journal of Monetary Economics, 27(3), 333-359.
Bohn, H. (2007). Are stationarity and cointegration restrictions really necessary for the
intertemporal budget constraint? Journal of Monetary Economics, 54(7), 1837–1847.
doi:10.1016/j.jmoneco.2006.12.012
Buiter, W.H., & Patel, U.R. (2006). India’s public finances: Excessive budget deficits, a
government-abused financial system and fiscal rules. Centre for Economic Policy Research
Discussion Paper.
Budget Deficit Sustainability and Revenue Expenditure Linkages in Major South Asian …
EJBE 2017, 10 (19) Page | 55
Buiter, W.H., Persson, T., & Minford, P. (1985). A guide to public sector debt and deficits.
Economic Policy,1(1), 13-79.
Carrion-i-Silvestre, J.L. (2016). Fiscal deficit sustainability of the Spanish region. Regional
Studies, 50(10), 1702-1713 .doi:10.1080/00343404.2015.1051017
Cochrane, J.H. (2010). Understanding policy in the great recession: Some unpleasant fiscal
arithmetic. NBER working paper.
Dalgıç, B., İyidoğan, P.V., & Balıkçıoğlu, E. (2014). Sustainability of fiscal policy: An empirical
examination for Turkish economy. Journal of Business Economics and Finance, 3(2), 13-137.
Deyshappriya, N.P.R. (2012). Debt and fiscal sustainability in Srilanka. International Journal of
Scientific and Research Publications, 2(3), 1-8.
Dumitrescu, E., & Hurlin, C. (2012).Testing for Granger non-causality in heterogeneous
panels. Economic Modelling, 29(4), 1450-1460.
Edirisinghe, N., & Sivarajasingham, S. (2015).Testing the inter-temporal relationship between
government spending and revenue: Evidence from Sri Lanka. Global Journal of Human -
Social Science: E Economics, 15(7).
Ehrhart, C., & Llorca,M. (2007). A global perspective of fiscal sustainability: Evidence from a
panel of 20 OECD countries. Retrieved on May 15, 2015,from:
http://macro.soc.uoc.gr/11conf/docs/Fiscal_sustainability_OECD_countries...
Ejaz, K., & Javid, A.Y. (2011).An assessment of debt sustainability in scenario of Pakistan's
debt burden. MPRA Paper.
Friedman, M. (1978).The limitation of tax limitation. Policy Review, 5, 7-14.
Goyal, R., Khundrakpam , J.K., & Ray,P. (2004). Is India’s public finance sustainable? Or, are
the claims exaggerated? Journal of Policy Modeling, 26(3), 401–420.
Gregory,A.W., & Hansen,B.E. (1996). Residual-based tests for cointegration in models with
regime shifts. Journal of Econometrics, 70(1), 99-126.
Hakkio, C. S., & Rush, M. (1991). Is the budget deficit ‘too large?’ Economic Inquiry, 29(3),
429–445.
Hamilton, J., & Flavin, M. (1986). On the limitations of government borrowing: A framework
for empirical testing. American Economic Review, 76(4), 808–819.
Haug, A. (1991). Cointegration and government borrowing constraints: Evidence for the U.S.
Journal of Business and Economic Statistics, 9(1), 97–101.
Hoover, K.D., & Sheffrin,S. (1992). Causation, spending and taxes: Sand in the sandbox or tax
collector for the welfare state. American Economic Review, 82(1), 225 – 248.
IMF(2016). Fiscal monitor: Acting now, acting together. Washington, DC: International
Monetary Fund.
Jha, R. (2010). Fiscal policies and challenges in South Asia. Retrieved on October 28, 2015,
from SSRN website: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1535147
Jha, R., & Sharma, A. (2004). Structural breaks, unit roots, and cointegration: A further test
of the sustainability of the Indian fiscal deficit. Public Finance Review, 32(2), 196–219.
doi: 10.1177/1091142103260858
Jibrilla, A. A. (2016). Fiscal sustainability in the presence of structural breaks: Does
overconfidence on resource exports hurt government’s ability to finance debt? Evidence
from Nigeria.Cogent Economics and Finance, 4, 1-27.
Shruti SHASTRI, Arun Kumar GIRI & Geetilaxmi MOHAPATRA
Page | 56 EJBE 2017, 10 (19)
Johansen,S.,& Juselius, K.(1990). Maximum likelihood estimation and inference on
cointegration with applications to the demand for money. Oxford Bulletin of Economics and
Statistics, 52(2), 169-210.
Kalyoncu, H. (2005). Fiscal policy sustainability: Test of intertemporal borrowing constraints.
Applied Economic Letters, 12(15), 957–962.
Kaur,B., & Mukherjee, A. (2012). Threshold level of debt and public debt sustainability: The
Indian experience. Reserve Bank of India Occasional Papers.
Leeper, E.M., & Walker, T.B. (2011). Fiscal limits in advanced economies. NBER working
paper.
Maddala, G.S., & Wu, S. (1999). A comparative study of unit root tests with panel data and a
new simple test. Oxford Bulletin of Economics and Statistics, 61(S1), 631–652.
doi:10.1111/1468-0084.0610s1631
Mahmood, T., Arby, M.F., & Sherazi, H. (2014). Debt Sustainability: A comparative analysis of
SAARC countries. Pakistan Economic and Social Review, 52(1), 15-34.
Martin, G. (2000). US deficit sustainability: A new approach based on multiple endogenous
breaks. Journal of Applied Econometrics, 15(1), 83–105.doi: 10.1002/(SICI)1099-
1255(200001/02)15:1<83::AID-JAE543>3.0.CO;2-J
Mehrara, M., Pahlavani, M., & Elyasi, Y. (2011). Government revenue and government
expenditure nexus in Asian countries: Panel cointegration and causality. International
Journal of Business and Social Sciences, 2(7), 199-207.
Mercan, M. (2013). Budget deficits sustainable? An empirical analysis for OECD countries.
Procedia - Social and Behavioral Sciences,131, 258 – 263.
Munawar-Shah, S., Mariani, A., & Syed, H.(2014). Assessing fiscal sustainability for SAARC
and IMT-GT countries. Romanion Journal of Fiscal Policy, 5(2), 26-40.
Mutascu, M. (2015). Government revenues and expenditures in the EU ex-communist
countries: A bootstrap panel Granger causality approach. Retrieved on May 23, 2015, from:
https://halshs.archives-ouvertes.fr/halshs-01109233/document
Olekalns, N., & Cashin, P. (1997). An examination of the sustainability of Indian fiscal policy.
Retrieved on May 15, 2015, from: http://fbe.unimelb.edu.au/data/assets/pdf_file/
0012/805989/748.pdf
Ostry, J.D., Atish, R.G., Kim,J.U., & Qureshi, M.S.(2011). Fiscal space. IMF Staff Position Note.
Owoye, O. (1995).The causal relationship between taxes and expenditures in the G7
countries: Cointegration and error-correction models. Applied Economics Letters, 2(1), 19-
22.
Park, W. K. (1998). Granger causality between government revenues and expenditures in
Korea. Journal of Economic Development, 23(1), 145-155.
Payne, J.E., Mohammadi , H., & Cak, M. (2008). Turkish budget deficit sustainability and the
revenue-expenditure nexus. Applied Economics, 40(7), 823-830.
Peacock, A., & Wiseman, J. (1979). Approaches to the analysis of government expenditures
growth. Public Finance Quarterly, 7(1), 3–23.
Pedroni, P. (1999).Critical values for cointegration tests in heterogeneous panels with
multiple regressors. Oxford Bulletin of Economics and Statistics, 61(S1), 653-70.
Budget Deficit Sustainability and Revenue Expenditure Linkages in Major South Asian …
EJBE 2017, 10 (19) Page | 57
Pedroni, P. (2000). Fully Modified OLS for Heterogenous Cointegrated Panels, In B.Baltagi
(Ed.) Advances in Econometrics: Non Stationary Panels, Panel Cointegration and Dynamic
Panels, 15, 93-150.
Perron, P. (1989).The great crash, the oil price shock, and the unit root hypothesis.
Econometrica, 57, 1361-1401.
Perron, P., & Vogelsang, T.J. (1992). Nonstationarity and level shifts with an application to
purchasing power parity. Journal of Business and Economics Statistics, 10(3), 301–320.
Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross-section
dependence. Journal of Applied Econometrics, 22(2), 265–312.doi: 10.1002/jae.951
Pesaran, M. H., & Smith, R.P. (1995). Estimating long-run relationships from dynamic
heterogeneous panels. Journal of Econometrics, 68(1), 79–113.
Phillips, P.C. (1987). Time series regression with a unit root. Econometrica, 55(2), 277–301.
Puah, C.H., Lau, E., & Teo, H.F. (2008). Assessment of budget sustainability in Sarawak. Asian
Economic and Financial Review, 2(8), 952-965.
Quintos, C.E. (1995).Sustainability of the deficit process with structural shifts. Journal of
Business and Economic Statistics, 13(4), 409-417.
Richter, C., & Dimtrios, P. (2013). Tax and spend, spend and tax, fiscal synchronisation or
institutional separation? Examining the case of Greece. Romanian Journal of Fiscal Policy,
4(2), 1-17.
Stock, J.J., & Watson, M. W. (1993). A simple estimator of cointegrating vectors in higher
order integrated systems. Econometrica, 61 (4), 783-820.
Toda, H., & Yamamoto, T. (1995). Statistical inference in vector autoregressions with possibly
integrated processes. Journal of Econometrics, 66(1-2), 225-250. doi: 10.1016/0304-
4076(94)01616-8
Trehan, B., & Walsh, C. (1991).Testing intertemporal budget constraints: Theory and
applications to U.S. federal budget and current account deficits. Journal of Money, Credit
and Banking, 23(2), 206-223.
Uctum, M., Thurston,T. and Uctum, R. (2006). Public debt, the unit root hypothesis and
structural breaks: A multi-country analysis. Economica, 73(289), 129-156.
Vogelsang, T.J., & Perron, P. (1998). Additional test for unit root allowing for a break in the
trend function at an unknown time. International Economic Review, 39(4), 1073–1100. doi:
10.2307/2527353
Westerlund, J. (2007).Testing for error correction in panel data. Oxford Bulletin of Economics
and Statistics,69(6),709-748.doi: 10.1111/j.1468-0084.2007.00477.x
Westerlund, J., & Prohl, S. (2010). Panel cointegration tests of the sustainability hypothesis
in rich OECD countries. Applied Economics, 42(11), 1355-1364.doi:
10.1080/00036840701721323
Wilcox, D. (1989). The sustainability of government deficits: Implications of the present value
borrowing constraint. Journal of Money, Credit and Banking, 21(3), 291-306.
World Bank(2016). South Asia economic focus, spring 2016: Fading tailwinds. Washington,
DC: World Bank.

Thank you for copying data from http://www.arastirmax.com