Tax Revenue, Public Spending and Economic Growth in Cote d'Ivoire: Evidence on the Causality Issue

Abstract

This paper examines the tax revenue and public spending nexus in Cote d’Ivoire in a multivariate framework using real Gross Domestic Product (GDP) as measure of economic growth over the period 1960 to 2019. The cointegration link among variables used ARDL, FMOLS, and DOLS estimators while the causality among variables was established employing Granger (1969) causality test and Toda and Yamamoto (1995) non-Granger causality test. Cointegration analysis affirms the existence of a long-run relationship between variables. The results of the causal analyses show a unidirectional causality running from tax revenue to public spending, supporting the "tax-and-spend" hypothesis. This implies that the Ivorian government does not first engages in spending and then later, to pay for this spending, it collects tax revenue. Because such a situation will exacerbate fiscal imbalance bearing in mind all the difficulties of collecting tax revenue in Cote d'Ivoire. Based on these findings, a credible strategy should focus more on spending cuts rather than look for ways to raise revenues.

Keywords: Tax revenue, Public spending, Economic growth, Cointegration, Causality, Côte d´Ivoire.

DOI: 10.7176/JESD/12-16-07

Publication date:August 31^st 2021