An Exam ination of the Relationship between Government Revenue and Government Expenditure in Nigeria: A Cointegration and Causality Approach

Fiscal policy, which entails an appropriate alignment in government revenue and expenditure, is of crucial importance in promoting price stability and sustainable growth in output, income and employment. It is one of the macroeconomic policy instruments that can be used to prevent or reduce short-run fluctuations in output, income and employment in order to move an economy to its potential level. However, for sound fiscal policy, a good understanding of the relationship between government revenue and government expenditure is very important, for instance, in addressing fiscal imbalances. Thus, the causal relationship between public revenue and public expenditure has been an issue that has generated heated debates globally, over the years, among economists and policy analysts. Four major hypotheses have emanated from the debates namely: the revenue-spend hypothesis (where there is a unidirectional causality from government revenue to government expenditure); the spend-revenue hypothesis (where there is a unidirectional causality from government expenditure to government revenue); the fiscal synchronization hypothesis (where there is bidirectional causality between government revenue and government expenditure); and the institutional separation hypothesis (where there is no causality between government revenue and government expenditure). This study makes a modest contribution to the debates by empirically analyzing the relationship between government revenue and government expenditure in Nigeria, using time series data from 1970 to 2007, obtained from the Central Bank of Nigeria (2004, 2007). In particular, the study examines the validity of the four aforementioned hypotheses to Nigeria. It employs the Engel-Granger two-step cointegration technique, the Johansen cointegration method and the Granger causality test within the Error Correction Modeling (ECM) framework. Empirical findings from the study indicate, among other things, that there is a long-run relationship between government revenue and government expenditure in Nigeria. There is also evidence of a unidirectional causality from government revenue to government expenditure. Thus, the findings support the revenuespend hypothesis for Nigeria, indicating that changes in government revenue induce changes in government expenditure. The empirical findings suggest, among other things, that: controlling the swings in government revenue is very necessary in controlling government expenditure and avoiding unsustainable fiscal imbalances in Nigeria; and to increase government spending, efforts should be made to enhance government revenue, but efforts to enhance government revenue should be accompanied with appropriate  Dr. E. C. Obioma is a Principal Economist in the Liquidity Assessment Division, Monetary Policy Department, CBN. Uche M. Ozughalu is a Lecturer in the Department of Economics, Anambra State University, Igbariam Campus. The comments and suggestions of anonymous reviewers are duly acknowledged. The views expressed in this paper are those of the authors and do not necessarily represent the views of the institutions to which they are affiliated or those of the CBN or its policy.