An investigation of tax revenues and government spending: Evidence from Turkey

Abstract

This paper investigates the short and long run relationship between government spending and government revenues from taxation for Turkey. To this end, Johansen co-integration test, VECM, Granger causality test and variance decomposition analysis is employed using monthly data for the time period from 1994:1 to 2007:6. The empirical results indicate that there exists both short run and long run bi-directional causality between government spending and tax revenues in Turkey. The results are consistent with the fiscal synchronization hypothesis according to which expenditure and taxation decisions are jointly determined. Thus, the Turkish government should simultaneously define the spending program along with the tax revenues for the optimal solution of budget deficits.