Relationship between public expenditures, tax revenue, institutional quality and economic growth: The case of E7 countries

This study aimed to examine the relationship between public expenditure, tax revenue, institutional quality, and economic growth in E7 countries using data from the period 2002-2020. For this purpose, variables such as Gross Domestic Product (GDP), public expenditure (PE), tax revenue (TR), and institutional quality (IQ) were utilized. Cross-sectional dependency was evaluated through four Cross-Sectional Dependence (CD) tests, and cross-sectional dependence among the series was identified. Subsequently, the CADF panel unit root test was conducted to determine the stationarity levels of the series, revealing that public expenditure was stationary at level while other variables were stationary at first differences. The Westerlund (2008) cointegration test was applied to determine the long-term relationship between the variables, indicating that the variables moved together in the long run. Long-term coefficients were estimated using Augmented Mean Group (AMG) estimators, revealing that the effect of public expenditure and institutional quality on economic growth was negative, while tax revenue was found to be insignificant. The causality relationship between the variables was examined using the Dumitrescu and Hurlin (2012) panel causality test, which indicated one-way causality relationships between institutional quality and economic growth, tax revenue and economic growth, and economic growth and public expenditure. Additionally, one-way causality relationships were found from institutional quality to tax revenue and from public expenditure to institutional quality. These findings suggest that E7 countries should focus on institutional reforms, public expenditure, tax collection systems, and supportive policies for economic growth to enhance their long-term economic growth. Keywords: Public expenditure, tax revenue, ınstitutional quality, economic growth, panel cointegration, panel causality