Tax-and-Spend, Spend-and-Tax, Fiscal Synchronization, or Fiscal Separation: Emerging Evidence from Nigeria

Abstract

The main thrust of this research was to explore the revenue and expenditure nexus on Nigeria from 1981 to 2016. It tried to uncover the expenditure hypothesis that Nigeria’s government had adopted in her budgeting. Time series data obtained from the statistical bulletin of the Central Bank of Nigeria (CBN) was used for the study, and it was subjected to unit-root tests. The results from Augmented Dickey Fuller (ADF) and Philip-Perron tests indicated that the variables only became stationary after differencing once. Accordingly, Johansen cointegration test was conducted and results revealed a longrun relationship between the variables. An Error Correction Model (ECM) was carried out to tie the shortrun dynamics with longrun equilibrium. The ECM exhibited the right sign and significant in both models. The results equally provided empirical evidence that government expenditure has significant effect on revenue in Nigeria as there was a negative and significant relationship between them at various lags when expenditure was made the dependent variable. A positive and significant relationship existed between the variables at various lags when revenue was made the dependent variable. The results of Granger causality tests showed that unidirectional causality runs from expenditure to revenue in Nigeria and this confirmed the adoption of Spend-Tax Hypothesis in Nigeria.  Based on these findings, it was recommended that the government should lay more emphases on revenue than expenditure to remove/reduce budget deficits; should explore other viable avenues other than oil to increase its revenue; emphases should be placed on capital expenditure than on recurrent expenditure as this will help in reducing the over bearing expenditure profile of the country and removal of fiscal imbalances.

Keywords: Revenue, Expenditure, Budgeting, Cointegration, Error Correction Model