The Relationship Between Government Revenues And Expenditures: Bootstrap Panel Granger Causality Analysis On European Countries

The objective of this paper is to test the relationship between government expenditure and revenue nexus in EU 10 countries during the period 1980-2013. This study uses the panel causality approach proposed by Kónya (2006) that take into account cross section dependency and heterogeneity across countries. The first empirical results point to the "tax-spend hypothesis" for Germany, Italy, and Netherlands. We found government expenditure Granger causes government revenue for France and Portugal, consistent with the "spend-tax hypothesis". But, there is no relationship between these fiscal variables for Austria, Belgium, Denmark, Finland, and UK, pointing support the "institutional separation hypothesis" or "fiscal independence hypothesis". After determining the direction of the causality in a country, government must manage the eligible fiscal policies, restore the fiscal balance and reduce the public deficits for a sustainable fiscal and economic path.