The revenue-expenditure nexus: Historical evidence for South Africa

Results from unit root and cointegration tests suggest that, allowing for structural breaks, government revenue and expenditure in South Africa during 1895-2005 were I(1) series and cointegrated. Results from Granger-type causality tests suggest that a bidirectional Granger-causal relation existed between revenue and expenditure for the full sample period and for sub-periods up to the 1960s, consistent with the so-called "fiscal synchronisation hypothesis". However, in the 1960s the causal relation appears to have shifted to run from expenditure to taxation, consistent with Peacock and Wiseman's "displacement effect". In the context of the recent fiscal consolidation literature, the South African fiscal experience would appear to be generally consistent with either revenue- or expenditure-led fiscal consolidation efforts, but with the more recent evidence favoring expenditure-led consolidations.