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The Causal Link between Government Expenditure and Government Revenue in Ghana

Keywords: Government Revenue , Government Expenditure , Gross Domestic Product , Causality test , Ghana

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Abstract:

The study aimed at determining the causal link between government expenditure and government revenue of Ghana over the period 1960 to 2007. Four hypotheses were tested namely: tax-spend hypothesis, spend-tax hypothesis, fiscal synchronization hypothesis and institutional separation hypothesis. The data was obtained from World Bank development indicators’ and the state of the Ghanaian economy. The study employed Granger causality test, augmented Dickey and Fuller (ADF) and Phillip-Perron (PP) tests to examine the causal link between government expenditure and revenue of Ghana. The result shows that there is bi-directional causality such that both government expenditure and government revenue of Ghana have temporal precedence over each other. This means that changes in government revenue precede changes in government expenditure. In order to ensure that expenditure do not move too far away from revenue, the tax net of Ghana should be expanded to capture all “taxable” individuals and firms to increase government revenue.

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