Nexus Between Government Expenditure and Government Tax Revenue in Sri Lanka

This study is to find the relationship between government expenditure and government tax revenue in Sri Lanka, using time series data from 1990-2017. Public expenditure was used as the dependent variable in the model while tax revenue, inflation, public debt, and population were the independent variables considered. Stationarity of the time series was tested employing Augmented Dickey–Fuller (ADF) unit root. Johansen’s maximum likelihood estimation of the parameters of a co-integrating equation was employed to examine long-run relationship between the variables. In addition, Granger causality test was performed to identify the causal relationship between public expenditure and selected independent variables. The results confirmed the existence of long-run relationship between the public expenditure and tax revenue. The presence of a unidirectional causality between government expenditure and tax revenue was reveled through the results. The study outcomes suggest the necessity of constructive policy decisions pertaining to government revenue and expenditure in view of promoting the Sri Lankan economy.