Analysis Of The Asymmetric Relationship Between Public Expenditure And Tax Revenue In Kenya

Abstract

The concern over widening fiscal deficits has generated a host of debates in many countries globally, driven by literature on the topic of tax revenue and public expenditure termed as the revenue-expenditure nexus. In light of recent developments in time series analysis, the revenue-expenditure nexus is examined using an asymmetric approach. Therefore, this study adopts a non-linear framework to analyze the nexus thus departs from applying a standard cointegration model. The TAR and MTAR framework advanced by Enders & Granger (1998) and Enders & Siklos (2001) are employed in analysis. The purpose of the study is to investigate evidence of a causal link, long run equilibrium between the variables and check for existence of nonlinear behavior in the fiscal correction process in Kenya. This study analyses monthly time series secondary data collected from 2001:1 to 2018:8. The threshold cointegration technique is applied to estimate the asymmetric ECM. The empirical outcome supports evidence of nonlinear adjustment using the MTAR framework only. This study observes that adjustment to fiscal imbalances is more rapid when the fiscal position is favorable than when it is deteriorating. In the short run, bilateral causality between public outlays and tax revenue is detected in favor of the fiscal synchronization proposition and in the long run the causal nexus runs from tax revenue to state spending in support of the tax and spend premise. From the findings, the policy implications include; to trim the widening fiscal deficit it is imperative for the state to enhance revenue collection efforts. Secondly, to address asymmetries in adjustment to fiscal disequilibrium, it is crucial for the state to focus on public investments in critical sectors of the economy in the long term.