Changes in the tax-spend nexus: Evidence from selected European countries

This study assesses the tax-spend nexus in Germany, the United Kingdom (UK), France, Italy and Spain using quarterly data for the period 1995-2019. Different from previous studies, we test for changes in the causality links between government expenditures and revenues because the recent economic crisis and political changes in these countries may have shifted their tax-spend nexus. Based on the recursive rolling test developed by Shi et al. (2018), we found that the direction of causality in the tax-spend nexus for these countries significantly changed after the 2008 crisis and a series of recovery and stability policies implemented over 2010-2012. While there are several periods before and during the crisis where institutional separation hypothesis prevailed, the after-crisis data support uninterrupted causality links between revenues and expenditures in all countries: tax-and-spend in Germany, the UK and Italy; spend-and-tax in France; and fiscal synchronization in Spain.