Empirical Investigation of the Validation of Peacock-Wiseman Hypothesis; Implication for Fiscal Discipline in Nigeria

Abstract

This study attempted to examine the direction of causality between government expenditure and revenue in Nigeria. This was with a view to examining the validity of Peacock-Wiseman hypothesis and its implications on Nigerian economy. Times series data on variables (government expenditure, government revenue and inflation) covering the period (1961-2010) were used after a thorough investigation of the statistical properties of these variables. The data were sourced from CBN Statistical Bulletin 2010 edition, CBN Annual Reports (various years) and World Development Indicators of the World Bank CD-ROM. The study employed Johansen multivariate cointegration technique, Vector Error Correction Mechanism (VECM) and standard Granger causality tests. The result showed that variables converge to a long-run equilibrium. Also, the VECM results indicate that unidirectional causality running from expenditure to revenue was found supporting Peacock-Wiseman spend-revenue hypothesis. Standard Granger causality test was also carried out on the first difference of the two fiscal variables; the result showed that there existed a short-run unidirectional causality running from expenditure to revenue validating Peacock-Wiseman spend-revenue hypothesis. Hence, this hypothesis holds in Nigeria both in the short-run as well as in the long-run.

This implies that government spending induced government revenue growth in Nigeria. Also, the result of the impulse response revealed that the evolution of government expenditure and revenue followed a different trend.

The study concluded that government spending decision occurred prior the decision to raise revenue during the period under investigation.

Keywords: causality, multivariate, converge, uni-directional, short-run, long-run.