Public Revenue‐Expenditure Nexus in South Africa: Are there Asymmetries?

• Author: Hamisu Sadi Ali,Aliyu Alhaji Jibrilla,Abdalla Sirag,Ibrahim Muye Muhammad,Ahmad Zubaidi Baharumshah
• DOI: http://doi.org/10.1111/saje.12130
• Published date: 01 December 2016
• Date: 01 December 2016

PUBLIC REVENUE-EXPENDITURE NEXUS IN SOUTH

AFRICA: ARE THERE ASYMMETRIES?

AHMAD ZUBAIDI BAHARUMSHAH

†

,ALIYU ALHAJI JIBRILLA*, ABDALLA SIRAG

†

,HAMISU SADI ALI

†

AND

IBRAHIM MUYE MUHAMMAD

†

Abstract

This paper re-examines the government revenue and expenditure relationship in South Africa

using Enders and Siklos’ Threshold adjustment and Granger causality tests. The paper allows for

structural breaks in the unit root and cointegration tests. The results indicate the absence of any

asymmetries in both the threshold autoregression and momentum threshold autoregression speci-

fications of adjustments in the South African’s budgeting process. The estimated symmetric error-

correction models provide support for the fiscal synchronization hypothesis of government reve-

nues and expenditures for long-run and short-run dynamic equilibrium. These findings indicate

that the South African fiscal authorities should try to maintain or even improve the control of

their fiscal policy instruments to sustain the prudent budgetary process.

JEL Classification: C0, C51, E62, H2

Keywords: Revenues, expenditure, fiscal policy, threshold cointegration, causality test

1. INTRODUCTION

Understanding the trend of government revenue and expenditure is crucial for a prudent

budgetary process and may prevent unnecessary fiscal deficit. The behaviour of expenditure

may be an indication of the firmness of public revenue. Consistency of public revenue and

spending indicates an efficient fiscal channel that can ensure social welfare maximization.

The discrepancy between government revenue and expenditure, which is often regarded as

fiscal imbalance, has serious implications on a nation’s savings and investment decisions.

South Africa is one of the countries that has consistently been faced with the problem

of fiscal deficit. Notwithstanding the fiscal challenges that face the country, between

1961 and 2008, it was able to maintain relatively stable fiscal outcomes; in particular, the

country was able to uphold a relatively moderate public debt burden that only fluctuated

between 23.8% and 50.4% of gross domestic product (see Calitz et al., 2014). However,

like any other economy, the country was not spared from both domestic and interna-

tional shocks that had important implications for its budgetary process. For example, the

country started experiencing a large fiscal deficit due to the 2008/9 global financial crisis.

Following the crisis, the country’s public debt started rising again due to the falling tax

* Corresponding author: Academic researcher, Department of Economics, Faculty of Arts,

Social and Management Sciences, Adamawa State University, Mubi, Nigeria.

E-mail: aliyumaiha@gmail.com

†

Faculty of Economics and Management, Universiti Putra Malaysia

The authors are grateful to the Department of Economics, Faculty of Economics and

Management, University Putra Malaysia which generously offered them all facilities needed to

conduct this research.

V

C2016 Economic Society of South Africa. doi: 10.1111/saje.12130

520

South African Journal of Economics Vol. 84:4 December 2016

South African Journal

of Economics

revenue of the government (Burger et al., 2011). For example, it rose from 31.3% in

2010 to about 43% in 2013.

1

This implies a higher fiscal deficit, which, of course, as

noted by Lusinyan and Thornton (2007), can lead to an increase in future tax liability.

Given the historical fluctuations of public debt in the country, there may be a consequen-

tial effect on the tax revenue-expenditure decisions of the government and of the pros-

pect for the country’s fiscal prudence. Nonetheless, a proper understanding of South

African fiscal performance may require empirical investigation of the government revenue

and expenditure decisions in the country.

Among the major instruments often studied in the literature, particularly in the con-

text of the public finance debate, is the role played by government revenues and expendi-

tures in easing any existing fiscal deficit or balancing the budget. For example, the

adjustment of public tax or spending in response to changes in the fiscal budget deficit

or surplus is critical for the sustainability of the fiscal balance.

In the literature, a number of hypotheses have been put in place to explain the behav-

iour of government revenues and expenditures, namely, the spend-and-tax hypothesis,

tax-and-spend hypothesis, fiscal synchronization hypothesis and the institutional separa-

tion hypothesis. While the first three hypotheses imply the interdependence of public

revenue and spending, the institutional separation hypothesis suggests an independent

relationship between fiscal revenue and spending (see, e.g. Roberts, 1978; Peacock and

Wiseman, 1979; Abdul-Aziz et al., 2000; Payne, 2003; Paleologou, 2013).

The spend-and-tax hypothesis suggests that the decision of government expenditure

induces public tax or revenue, while the tax-and-spend hypothesis indicates that tax reve-

nue influences a government’s expenditure decisions. For example, higher tax revenue

leads to more public spending. The fiscal synchronization hypothesis implies a bi-

directional relationship between government revenue and expenditure. That is, tax and

expenditure decisions are made simultaneously. Conversely, the institutional separation

hypothesis suggests that public tax decisions are uncorrelated with expenditure decisions.

While these hypotheses often suggest that the relationship between public revenues and

expenditures follows a symmetric adjustment process, this assumption could lead to

wrong policy prescription if the actual relation happens to be asymmetric.

As pointed out by Ewing et al. (2006), accounting for asymmetric behaviour in the rela-

tionship between revenue and expenditure appears essential for many reasons. First, policy-

makers may react in a different way to any changes in the deficit or surplus, e.g. if the deficit

was greater than its long-run trend, the policy response is expected to be more aggressive than

if it was less than its trend. Second, due to the close connection between the budgetary process

and the business cycle, through the automatic stabilizer, and the fact that the business cycle

often displays asymmetric behaviour (see also a similar asymmetric argument in Jibrilla and

Mohammed, 2015), the associated change in the budget could also be asymmetric. Third, the

response of taxpayers to changes in the effective tax rate or tax base may lead to asymmetric

differences in the budget. Fourth, tax revenue, in some cases, is highly reactive to certain inter-

nal and external developments. For instance, trade tax revenue is sensitive to the international

economy condition, such as asymmetric variations in exchange rates or interest rates.

A number of empirical studies have evaluated the direction of causality between public

revenues and expenditures. For example, Westerlund et al. (2011) find evidence supporting

1

See South Africa, African Economic Outlook (2014).

521South African Journal of Economics Vol. 84:4 December 2016

V

C2016 Economic Society of South Africa.