The Intertemporal Relation Between Government Revenue and Expenditure in the United Kingdom, 1750-2004

Abstract

We examine the intertemporal relation between government revenue and expenditure in the UK during 1750–2004. We pay particular attention to long-run trends by applying a battery of unit root and cointegration techniques to the data, and we use a modified Granger-causality test on data spans organized around structural breaks in the series. The results suggest that, allowing for structural breaks, UK real revenue and spending are I(1) series and cointegrated and that Granger-causality runs from government spending to revenue. As such, the ― spend-tax‖ hypothesis appears to best characterize the long-run intertemporal relation between government revenue and spending in the UK.

Keywords: Government revenue and expenditure, Unit roots, Cointegration, Causality, Structural breaks

JEL Classification: E62, H61, H62