Application of Granger Causality Tests to Revenue and Expenditure of Swiss cantons

This paper applies Granger causality tests to Swiss Cantonal Revenue and Expenditure in levels. It is the first study for Switzerland at the individual regional level and on the basis of vector error correction models distinguishing between long-term and short-term causality. The long-term relation observed either extends from revenue to expenditure, extends from expenditure to revenue, is non-existent or mutual depending on the canton. This confirms the unsuitability of performing the analysis at the aggregate level (all cantons) and shows that policy implications on deficit control and theoretical explanations of public sector growth differ according to the causality observed.