Tax Revenue and Expenditure: A Causality Test for Gujarat State

Abstract

The paper examines the causality between Government Expenditure and Tax Revenue of Gujarat State for the period of 1985 to 2010. The empirical analysis employs Unit Root Test, Cointegration and VAR model for examining the causality between Tax Revenue and Expenditure. Gujarat is achieving double digit growth for last couple of years that provides a greater base for collecting Tax Revenue. The higher economic growth needs significant financial resources to be pumped in the economy, leading to expand the size of budget. 
The interdependence of Tax Revenue and Expenditure is one of the major obstacles to achieve fiscal discipline and thus, it becomes vital to assess the interrelationship between Tax Revenue and Government Expenditure. The paper concludes that in case of the Gujarat, only unidirectional causality is seen, indicating Tax Revenue influences Government Expenditure. It also reveals that unless the long term relation between Tax Revenue and Expenditure is taken into consideration, it will not be possible to attain fiscal discipline.