Government Expenditure Causes the Revenue Generation by Government Taxation

Government phthisis Causes the Revenue Generation by Government TaxationINTRODUCTION1.1 OverviewThe relationship amid presidential term tax tax gross enhancement and phthisis is a truly important topic and has been an essential issue for many economists and form _or_ system of political relation makers as it represents budget shortage, establishment outlay Plans and taxation structure of a sylvan. Since the main objective of every government is to improve frugal harvest- beat with low debt levels, wagerer education system, schooling of infrastructure and job opportunities recrudesce monetary policy is needed to achieve these goals. From a short term perspective fiscal policy is said to be expansionary when government expendings exceeds the sum check revenue and the sequeling dearth is indeed financed by the government, even so if these intakes contributes in economic growing then there is a long term relationship exist among government expenditure and economic result. In addition different studies indicate that the determination of Economic growth is depended on tax levels. Whereas many believe that the most signifi can buoyt factor that contributes in economic growth is tax level as the collection for development purposes of most developed and developing countries depend on tax revenue.1.2 search ProblemIn Pakistan the level of budget dearths stir self-consistently increasing from 2005 which is then financed by the government through external and domestic borrowing resulting in a higher debt levels collect to high interest cost associated with it and virtuosos to more future tax expectations. Thus the financing by the government for the compensation of deficit is an important variable, several studies fork up put light on the outcome of fiscal deficit but very few set about tried to find the reasons and makes of these deficits which is why the nexus amid government revenue and expenditure is still an unsolved issue . Therefore the main purpose of this look for is to try out the causative relationship among government revenue and expenditure.1.3 Hypotheses Tax Revenue military campaigns Government disbursement. Government Expenditure causes Tax Revenue. Tax Revenue and Government Expenditure Bilaterally cause to each some some early(a).1.4 Outline of the takeThe research studies the causal relationship between government expenditure and tax revenue to see the reasons for the consistent budget deficits in Pakistan from many years. In addition time serial humansation analyses have been make to promise the trend of government expenditure and revenue based on the leading variable.CHAPTER 2LITERATURE checkLoganathan, Nanthakumar, Taha, and Roshaiza. (2007) have set a stable relationship between expenditure and revenue. Furthermore there is a semipermanent impact exist expenditures that enter as input into the production function and those that enter as inputs in investment technolog ies.Koch, Schoeman and Tonder (2005) found that there is an association between burden of taxes and economic growth gibe to the purposes based on the data of 1960-2002 if tax burden decreases economic growth improvers significantly.Friedman (1982) explains expenditure of the government depends on entire revenue because as taxes increases expenditure increases by which deficit remains at the same level, he believes that the level of fiscal deficit can non be reduced by increasing taxes.Buchanan and Wagner (1977) on the other batch have presented an alternative theory that increase in taxes does not lead towards low expenditures because taxes creates higher terms of goods for the public due to high interest cost associated with it Buchanan and Wagner suggest that in order to restore deficit government should limit its financing ability.Sobhee and Sanjeev (2004) tested the originator from tax to expenditure and from expenditure to taxes by using the data of public finance and f ounded that in a small economy government jump sustain the necessary funds then use them for public expenditure, therefore to avoid the situation of fiscal deficit the government must c arfully monitor and nurse its make passing programs.Fasano and Wang (2002) in a research on GCC countries founded that the primary Source of revenue is oil and due to the economic fluctuations medium-term expenditure strategy should be adoptive according to which expenditure should not exceed the non-oil revenue so that in recessions to compensate expenditures oil revenues can be injected by short-term accommodations.Second hypothesis where causation runs from expenditure to revenue the government first spend and then to accommodate the required level of expenditure adjusts tax policy.Peacock and Wiseman (1979) Argues that due to economic crises government expenditure increases and they also remain at the same level when the crises is over. In their view government expenditure in driven by stron g economic crises which is able to change public cognition about the size of the government.Gounder, Narayan, Prasad (2007) find compatibility with the second hypothesis that the increase in taxes for the accommodation of government outgo affects on the capital investment by investors due to the fear of paying higher taxes in future.The third base hypothesis is fiscal synchronization according to which expenditure and revenue decisions are self-supporting and bilaterally cause to each other. Reflecting the traditional theories for the demand for public goods.Meltzer and Richard (1981), according to him the demand of public expenditures and taxes need to compensate these expenditures are compared with many alternative spending programs for cost benefit analysis, therefore the practical implication of this hypothesis is two-way causality.Narayan and Narayan (2006) suggest three reasons regarding the importance of nexus between government revenue and expenditure first if halal im plementation on policies is taken into consideration regarding government revenue fiscal deficit can be avoided, second if causality runs from expenditure to revenue outflow increases due to the fear that government will spend first and pay for it later by increasing taxes. Third in nerve of bidirectional causality expenditure can rise faster than revenue which can create huge budget deficits because revenue and expenditure decisions are independent of each other.Baharumshah and Lau (2007) Find two sets of different results where the fiscal policy of Korea, capital of Singapore and Thailand is driven by expenditures where the government finances revenue for the planned expenditures according to the limit of the balanced budget which facilitate the long term sustainable budget position. until now the taxation system should be implement by taking care of the overall smooth fiscal policy. Whereas in case of Malaysia and Philippines expenditures and revenues are independent of each o ther and the level of government expenditures and revenues is determined through fiscal policy based on marginal cost and revenue. Furthermore the findings indicate that in order to achieve long-term economic growth fiscal consolidation is necessary to reduce deficits and debt levels which lead a country to fulfill expenditure priorities smash and provide funds to more productive sectors.Griffin and McKinley (1992) believes that the expenditure policies of the government should be directed towards long-term future growth and for the well being of the people, Therefore activities that contribute more on socio economic development should be increased instead of using resources and funds to military defense projects.King and Rebelo (1990) taxation has a very important role in the long run growth process of a country where growth is not affected by indirect taxation, however direct taxation is harmful for growth.Roshaiza, Taha, Nanthakumar and Loganathan (2008) found in an analysis of Malaysia that the major(ip) part of taxes is direct taxes and reducing direct and indirect taxes will lead to reduce in government expenditures, In addition non-tax revenue does not contribute much in economys growth.Hondroyiannis and Papapetrou (1996) find unidirectional causality running from government expenditure to revenues in Greece where the reason of fiscal deficit from a long period of time was government spending decisions. The government spending to GDP is very high in Greece which results an operating inefficiency for the economy. Furthermore the results indicated that reducing fiscal deficit without reducing the government expenditure will leads to failure.Ahiakpor and Amirkhalkhali (1989) Based on the analysis of Canada found that to show the relevant results of fiscal policy government increase taxes which is a temporary and incomplete act in order to fully take control over fiscal deficit the government must reduce or limit its expenditures instead of finding ways to increase tax revenue burden on public.Baghestani and McNown (2004) in a sight of Egypt and Jordan take up that to promote domestic savings and private investment it is necessary to eliminate budget deficit for two the counties. Baghestani supported the causality from tax revenue to expenditure in case of Egypt and bi-lateral causality in case Jordan. Furthermore promoted the process of privatization because it facilitate high domestic saving and investment and at the same time helps to reduce fiscal deficit.Neyapti (2008) studied the influence of fiscal decentralization on government revenue and expenditure and indicated that decentralization improves quality of governance which leads to decrease in budget deficit and stable economic condition. However the efficiency of fiscal decentralization increases in case of large population.Keho (2010) Study the data fo 1660 to 2005 to analyses the causal relationship between government expenditure and tax revenue to see which expenditure and revenue items plays a part in the reduction of budget deficit and found that GDP has significant effect on government expenditure. Furthermore the findings of granger causality test indicate unidirectional causality from government revenue to expenditure based on the findings Keho et al. concluded that the implementation for the elimination of fiscal deficit should not me make by just increasing revenues. Thus without spending cuts the results will not be beneficial. In other words tax system should be made with proper spending control system.Brennan and Buchanan (1980) suggest that in order to reduce fiscal deficit constitutional limits should be imposed on post-constitutional governments, so that revenue collection by latter governments can be reduced otherwise the level of goods demand by public to be financed will be minimum whereas revenue collection will be higher.Baffes and Anwar (1990) conducted the research for the countries Argentina, brazil, Chile, Mexico, and Pakis tan to determine the behavior of government towards revenue and expenditures for the alignment of fiscal deficit. The results found to be positive for Mexico, Brazil and Pakistan while the similar findings havent been found for Argentina and Chile. For Brazil, Mexico and Pakistan causality runs in both ways in other words bidirectional causality where decisions for the government spending and revenue are taken simultaneously. However in case of Argentina and Chile causality runs from expenditure to revenue. The results indicates that to control budget deficit the government should increase revenue collection and restrain expenditure whereas public expenditures should be reduced in Argentina and Chile.Stoian (2008) founded in case of Romania by applying Johansen cointegration and Error Correction model that the long run relationship between government revenue and expenditure do not affect major fiscal imbalances.CHAPTER 3RESEARCH METHODS3.1 mode of Data CollectionData of the two var iables Government Expenditure and Total Revenue is taken from tributary sources with the help of multiple sources which includes (Ministry of Finance), (State bank of Pakistan) and (Hand book of Statistics on Pakistan Economy).3.2 Sample SizeSample of 31 observations have been used by using the data of public finance from the year 1979-2010. Where the variable (Total Tax Revenue) has been created by adding indirect-tax, direct-tax, Non-tax revenue and surcharges and (Total Expenditure) has been calculated by adding Development and Non-Development Expenditures.3.3 Research ModelGranger model is used to find out the causality where TR is the total revenue and TE is total government expenditure.The above two equation represents the hypothesis where the causality running from total expenditure to revenue in equation one and from revenue to expenditure in equation two. Therefore incase of rejection of any hypothesis we conclude unidirectional causality between government expenditure to revenue. However, if both the hypothesis is rejected we concluded bidirectional causality in other words fiscal synchronization exists between government revenue and expenditure.3.4 Statistical TechniqueIn this research granger causality test by granger (1969) has been applied to study the causal relationship by comparing one time series with another (Government Expenditure with Government revenue) where one variable becomes the cause of the other variable to predict it significantly. In addition cross-correlation has been applied to assess the correlation between both time series variables.CHAPTER 4RESULTS4.1 Findings and Interpretation of the resultsTable 4.1Pairwise Granger Causality TestsDate 01/27/11 Time 1732Sample 1 32Lags 2Null HypothesisObsF-StatisticProb.TOTAL_EX does not Granger Cause TOTAL_RE300.841350.4430TOTAL_RE does not Granger Cause TOTAL_EX14.21328.E-05With the help of the summary given in the table above we find that there is a unidirectional causality exist betw een total government expenditure and total revenue, as the value of F-Statistic is 3.5 we will reject the null hypothesis (TOTAL_RE does not Granger Cause TOTAL_EX).Table 4.1.2Cross CorrelationsSeries PairTotal_Revenue with Total_ExpenditureLagCross CorrelationStd. Errora-16-.177.250-15-.143.243-14-.099.236-13-.056.229-12-.010.224-11.044.218-10.097.213-9.137.209-8.210.204-7.255.200-6.299.196-5.353.192-4.427.189-3.513.186-2.663.183-1.796.1800.994.1771.810.1802.662.1833.544.1864.431.1895.344.1926.271.1967.208.2008.148.2049.094.20910.053.21311.005.21812-.036.22413-.078.22914-.114.23615-.153.24316-.188.250a. Based on the assumption that the series are not cross correlated and that one of the series is white noise.Figure 4.1.1The results of cross-correlation indicates total revenue as a leading time series variabler with a strong correlation of .994 with government expenditures at lag 0, furthermore correlation a possitive correlation has been found from lag 1 to lag 11, However the cor relation is dexreasing and from 12 to 16 lags correlation in negative predicting that with the increase in total revenue, total government expenditure will decrease in furture.CHAPTER 5DISCUSSIONS, CONCLUSION, IMPLICATIONS AND FUTURE RESEARCH5.1 ConclusionIn this paper we have studied the causal link between total government expenditure and total revenue in Pakistan using granger causality test and the supportive cross correlation from 1979-2010. Our result from granger causality supports the hypothesis that tax revenue causes government expenditure in Pakistan. In addition cross correlation results have indicated long-term results that with the increase in revenue expenditures will increase. Therefore the major conclusion drawn from this research is that in order to eliminate the problem of fiscal deficit and sustainable economic growth government should focus on the policies which facilitate increasing revenue.5.2 DiscussionVarious studies have dismemberd the causal relationship between government expenditure and revenue. Some supported with unidirectional causality occurring from revenue to spending and from expenditure to revenue whereas some have indicated the result of bidirectional causality. However, both the variables have significant impact on budget deficit and economic growth. financial deficit in Pakistan is a major issue as the findings of cross correlation indicates that the revenue and expenditures are correlated which means that as revenue increase expenditure increases and deficit remains at the same level and to compensate this deficit government increases its debt financing from domestic and foreign sources which leads towards inflation and high interest rates.5.3 Implications and RecommendationsThe model and analysis of this study is very useful for economists and policy makers as it helps in enhancing revenue by tax reform programs. In addition for the determination of optimal spending expenditure reform assessment can be done through co st and benefit analysis which will help in setting objectives for tax collections and better utilization of taxes.5.4 Future ResearchFuture research possibilities could be as follows first variables like interior(a) income and debt financing could be included in the research. Second data sets of multiple countries would be interesting to analyze the causal relationship using the same model in comparison with this research.REFERENCESAhiakpor, J.C.W., Amirkhalkhali S. (1989). On the Difficulty of Eliminating Deficits with high Taxes Some Canadian Evidence. gray Economic journal, 56, pp. 24-31.Buchanan, J. M., Wagner, R. E. (1977). Democracy in Deficit, New York Academic Press.Baharumshah, A. Z., Lau, E. (2007). Regime Changes And The Sustainability Of Fiscal Imbalance In East Asian Countries. Elsevier, 24 (6), pp. 878-894Baghestani H., McNown R. (1994). 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