Title: The deficit-reduction debate in the USA: an investigation of cointegration and causality

Authors: Fatih Mangır; Bansi Sawhney

Addresses: Department of Economics, Selçuk University, Konya, Türkiye ' Merrick School of Business, University of Baltimore, 1420 North Charles Street, Baltimore, MD 21201, USA

Abstract: The most recent financial crisis and the great recession have led to renewed questioning of the US fiscal deficit problem. This study revisits the relationship between government expenditures and revenues in the USA using the most recent datasets. It examines the long run relationship between spending and revenue by testing for integration using Engle-Granger and Johansen-Juselius methods of cointegration. Results from cointegration tests suggest that a long run relationship between expenditures and revenues exists in the USA. The Granger causality tests indicate that there is a bidirectional causal relationship between the two variables. Not only do the expenditures cause revenues but revenues in turn cause spending in the USA. The finding strongly supports the fiscal synchronisation hypothesis proposed by Meltzer and Richard (1981). This study has important policy implications that call for simultaneous changes in both taxes and spending to control deficits in the USA.

Keywords: public expenditure; public revenue; cointegration; government deficits; causality tests; deficit reduction; USA; United States; fiscal synchronisation; deficit control.

DOI: 10.1504/IJRM.2013.059619

International Journal of Revenue Management, 2013 Vol.7 No.3/4, pp.210 - 222

Received: 16 Feb 2013
Accepted: 11 Jun 2013
Published online: 03 Mar 2015 *

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