An Investigation of Causality between Government Expenditures and Revenues

Abstract

This paper examined the relationship between government expenditure and government revenue
in Nigeria using causality test with annual time series data from 1961-2019. The study reviewed
the theoretical propositions which includes Tax-Spend Hypothesis, Spend-Tax Hypothesis, Fiscal
Synchronization Hypothesis and Institutional Separation Hypothesis. The findings of this study
validated the Tax-Spend hypothesis of the nexus between government revenue and government
expenditure and invalidated the other hypotheses on the government revenue-expenditure nexus
in Nigerian situation. Specifically, it was found that unidirectional causality ran from revenue per
capita to government expenditure per capita but there was no causal relationship in any of the
remaining five pairs of variables examined. It is recommended that, policy makers or regulatory
authorities need to understand when the expenditure is overblown so as to take appropriate
measures as a corrective action as well as diversifying the revenue base beyond oil revenue