Asymmetries in the revenue-expenditure nexus: New evidence from South Africa

In this study, we relax the conventional assumption of a linear cointegration relationship in the revenue-expenditure nexus by examining asymmetric equilibrium effects in the South African fiscal budget using quarterly data collected between 1960:Q1 and 2016:Q2. Our mode of empirical investigation is the MTAR model supplemented with a TEC component. Our estimation results can be summarized into three main empirical findings. Firstly, we find that the long-run elasticity between revenue and expenditure is less-than-unity which implies that the fiscal budget is weakly unsustainable. Secondly we find that positive ‘shocks’ to the fiscal budget are eradicated fairly quickly which means that fiscal authorities must implement their policies in a continuous, on-going fashion over the long run. Lastly, we observe bi-directional causality between revenues and expenditures which offers support in favour of the fiscal synchronization hypothesis. This last result implies that fiscal authorities should amend fiscal imbalances through increased consolidation between revenue collection and expenditure allocation.