Budgetary Deficits and Government Expenditure Growth: Toward a More Accurate Empirical Specification

The aim of this study is to provide a more accurate perspective of the empirical relationship between government expenditure growth and budget deficits. It specifies a model of demand for government expenditures that focuses on the effects of the tax revenue ratio, the relative price ofgovernment spending, income, population, political factors, and the dynamic structure of the relationship. The model is tested with United Kingdom data for the period 1955-1988. Similar to previous studies, the results show that deficit finance increases the demand for government spending, but they reject the implicit restrictions imposed on the empirical specifications of the previous studies.