Causal relationship between tax revenue and government expenditure in Zimbabwe (2009-2016)

Abstract

Knowledge on the long run connection between tax revenues and government expenditures are of huge significance for both fiscal and monetary arrangement in developing nation such as Zimbabwe. Two testable hypothesis were investigated which are: does tax revenue Granger-cause government expenditure and does government expenditure Granger-cause tax revenue. The impact of the two hypothesis were researched in the context of the Zimbabwean economy using time series monthly data that ranges from 2009 to 2016. In trying to come up with approach measures that would help resuscitate government’s ability to generate revenue for financing its activities, particularly budget deficits, an examination on the direction of causality between tax revenue and government expenditure asked consideration. The research utilized the pairwise Granger Causality test, unit root test amongst other tests and the findings show that there is a long run relationship between the two since the data was stationary at level. Granger Causality test concluded that there exist a bi-directional causal relationship between tax revenue and government expenditure (Fiscal Synchronisation hypothesis). Therefore, policy makers are not supposed to implement standalone policies since the two relate each other in the long run, decisions to be made are supposed to be made simultaneously.