A Causality Relationship Between Tax Revenue and Government Expenditure In Indonesia

Jaka Sriyana

Abstract

This paper attempts to model the relationship between tax revenue and government expenditure
for Indonesia over the period 1970-2007. The empirical analysis employs tests of cointegration
and Vector Error Correction Model (VECM). The empirical evidence suggests that
there is a long run relationship between tax and government expenditure, but in the short
term, the model explains unidirectional causality relationship, namely from tax revenue to
govern ment expenditure This finding indicates that the budget deficit increase continuously,
which threaten the fiscal sustainability in the long term. It suggests that the government
should organize a better management on public finance policies to support the tax-spend fiscal
policy.
Key words: tax, government, causality, expenditure, cointegration.

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