The causality between government expenditures and government revenues: the case of turkey (1980-2005)

In recent years, nearly all of the world?s econmies face the problem of continuing budget deficit. Growing budget deficit hits Turkey as well. To solve this problem, some economists suggest to increase tax or vice versa, while others suggest to curtail government expenditures. However, to decide which of these two hypothesis is applicable for the case of Turkey, it is crucial to find out the possible relationship between government revenues and expenditures in terms of both short and long run. In this study the co-integration and the causal relationship between government revenues and expenditures are examined based on both aggregated and disaggregated data at the period of 1980-2005 for Turkey. The results show that there is no long run relationship between both aggregated government revenues and expenditures and disaggregated current expenditures and tax revenues. The Granger causality test reveals that there is no relationship between aggregated government expenditures and revenues, also there is no relationship between dissaggregated tax revenues and transfer expenditures. The causality tests indicate evidence of spend tax hypothesis for disaggregated current expenditures and both tax and nontax revenues, investment expenditures and tax revenues. Nonetheless tests support the tax spend hypothesis for nontax revenues and transfer expenditures and investment expenditures as well.Keywords: Causality, Co-integration, Spend tax hypothesis, Tax spend hypothesis, institutional seperation hypothesis.