REVENUE AND EXPENDITURE PROFILES IN NIGERIA

REVENUE AND EXPENDITURE PROFILES IN NIGERIA

INTRODUCTION

The growing disparity between revenue and expenditure in many countries has been a source of concern to many economists, analysts and researchers. Such fiscal imbalances with the attendant adverse effects on economies have provoked intensive research on the causes and effects of such disparities, resulting to four alternative hypotheses relating to the relationship between government expenditure and revenue. The hypotheses are; the revenue-and-spend hypothesis, the spend-and-revenue hypothesis, the fiscal synchronization hypothesis or the fiscal neutrality hypothesis and the institutional separation hypothesis. In other to test the validity of these hypotheses, many authors have employed different methodologies, and their results have shown conflicting outcomes as shown in the literature. The main objective of this study is to ascertain the direction of causality between the disaggregated values of government revenue and expenditure in Nigeria by deploying a robust econometric methodology. The result would assist policy makers to recognize the source(s) of any fiscal imbalance that might exist and consequently, direct efforts to developing suitable strategies for a sound fiscal framework.

The rest of this study is organized as follows; Section two presents review of the relevant theoretical and empirical literature. Section three showcases the revenues and expenditures profiles of Nigeria. Section four provides an overview of the methodology applied to test for these relationships. Section four discusses the empirical findings while section five, concludes the study with policy implications.

REVENUE AND EXPENDITURE PROFILES IN NIGERIA

The characteristics of the total government revenues and expenditures in Nigeria are examined to support the econometric analysis in this work. For the purpose of this study, the authors adopted recurrent (TREXP) and capital (TCEXP) expenditures as components of expenditure (TEXP), while total revenue (TREV) is made up of oil (OILREV) and non-oil revenues (NON-OIL). Figure 1 x-rays the average percentage changes in these variables under study.

Emelogu and Uche (2010) studied the relationship between government revenue and government expenditure in Nigeria using time series data from 1970 to 2007. They utilized the Engel-Granger two-step co-integration technique, the Johansen co-integration method and the Granger causality test within the Error Correction Modeling (ECM) framework and found a long-run relationship between the two variables and a unidirectional causality running from government revenue to government in Nigeria. Saeed and Somaye (2012) investigated the causality and the long-run relationships between government expenditure and government revenue in oil exporting countries during 2000-2009 using P-VAR framework. Using oil revenue as proxy for total revenue, their result revealed that there is a positive unidirectional long-run relationship between oil revenue and government expenditures. Ogujiuba and Abraham (2012) also examined the revenue-spending hypothesis for Nigeria using macro data from 1970 to 2011. Applying correlation analysis, granger causality test, regression analysis, lag regression model, vector error correction model and impulse response analysis, they report that revenue and expenditure are highly correlated and that causality runs from revenue to expenditure in Nigeria. The vector error correction model also proves that there is a significant long run relationship between revenue and expenditure.

The second is the spend-and-revenue hypothesis, a reverse of the revenue-and-spend hypothesis in which revenue responds to prior spending changes. This hypothesis suggests that government would raise the funds to cover its spending, and therefore, higher government expenditures lead to higher government revenues. Thus, empirical results are expected to show a unidirectional relationship running from government expenditure to revenue. If the spend-revenue hypothesis holds, it suggests that government’s behaviour is such that it spends first and raises taxes later in order to pay for the spending. Several studies have tried to establish this relationship (Mithani and Khoon, 1999; Zinaz and Samina, 2010).

Hye and Jalil (2010) adopted the autoregressive distributive lag approach to cointegration, variance decomposition and rolling regression method to determine the causal relationship between expenditure and revenue of government. The results indicate that bidirectional long run relationship exists between government expenditure and revenue. The variance decomposition result further suggests that government revenue shock has sharp impact on the government expenditure compared to the revenue collection response to shock in government expenditure.

Elyasi1 and Rahimi (2012) also investigated the relationship between government revenue and expenditure in Iran by applying the bounds testing approach to cointegration. They showed that there is a bidirectional causal relationship between government expenditure and revenues in both the long run and short run. Al-Qudair (2005) and Elyasi1 and Rahimi (2012) however, could not give relevant policy prescriptions on the implications of their results.

Ali and Shah (2012), who examined government revenue and expenditure nexus using annual data for the period 1976-2009. They applied the Johansen co-integration and Granger causality techniques and found no relationship among the variables both in the long run and the short run granger. This result supports institutional separation hypothesis.