Academic journal article IUP Journal of Applied Economics

Fiscal Synchronization Hypothesis in Andhra Pradesh: An Empirical Testing

Academic journal article IUP Journal of Applied Economics

Fiscal Synchronization Hypothesis in Andhra Pradesh: An Empirical Testing

Article excerpt

Using the annual data for the period from 1980-81 to 2005-06, this paper attempts to test the nexus between total government expenditure and total government revenue in the case of Andhra Pradesh, within the empirical framework of causality and cointegration. The paper establishes the long-run equilibrium relationship between budget expenditure and revenue. Furthermore, it also finds evidence of unidirectional causality running from expenditure to revenue, thereby invalidating the fiscal synchronization hypothesis in Andhra Pradesh during the study period.

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The relationship between public revenue and public expenditure of the government is an important subject for discussion in public economics and it has assumed utmost importance in the recent past. The scope of public finance has considerably increased in modern times with the expansion in functions and responsibilities of the government. There are various research studies, which deal with this topic in the domain of public economics. Especially, there are many studies in this area, which try to find the nexus between the two.

Generally, in case of a government, the expenditure determines the revenue. Initially government determines the volume of expenditure that has to be incurred on various heads to perform certain obligations and then it tries to find out the sources of revenue to meet its expenditure. However, an individual first considers his income and then determines the volume of expenditure he has to incur on different heads or items of his consumption. Thus, it is evident that the government can expand or reduce its revenue (income) through taxation and other sources, according to its expenditure requirements, while such flexibility is not available in case of individuals.

Dalton (1923) opined, "while an individual adjusts income to expenditure, a public authority adjusts expenditure to income". In this context, there is an analogy stating that the government cuts the cloth according to the coat, whereas the individual cuts the coat according to cloth.

Findlay (1905) pointed out that the "characteristic of public expenditure is its compulsory character" since the government aims at public welfare, it cannot avoid or postpone expenditure on certain inevitable social (national) needs, while this is possible in case of individuals because they are self-motivated.

Against this background, the literature review and the need for this study are discussed next. Subsequently, the paper deals with the theoretical underpinning in public economics regarding the nexus between revenue and expenditure. Then it provides the methodology of the study, and examines the results and empirical tests conducted. Finally, it presents the conclusion with policy implications of the study.

Review of Literature

There are many studies that have investigated the nexus between the government revenue and expenditure using various statistical tools. The study of Von et al. (1986) investigated the nexus for the US government revenue and expenditure for the period from 1955 to 1981 and found that expenditure causes revenue. Anderson et al. (1989) also estimated the same for US economy but for a period from 1945 to 1981. The study also established the fact that expenditure causes revenue in case of the US.

Manage and Marlow (1986) found that there is close relationship between the government revenue and expenditure in the US. Further it is evident from their study that revenue affects expenditure. In 1987 also, they found some similarities between the expenditure and tax receipts in case of the state governments in the US (Manage and Marlow, 1987). The results of this study indicate that the tax receipts (revenue) cause expenditure in the case of the state governments of the US. Similarly, Ram (1988) in his study on US found bidirectional causality between public revenue and public expenditure. …

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