The Causality between Government Revenue and Government Expenditure in Iran

The causal relationship between government revenue and government expenditure is an important subject in public economics especially to the control of budget deficit. The purpose of this study is to investigate the relationship between government revenue and governmentexpenditure in Iran by applying the bounds testing approach to cointegration. The results of the causality test show that there is a bidirectional causal relationship between government expenditure and revenues in both long run and short run. Therefore, the results of this paper are consistent with fiscal synchronization hypothesis. The policy implication of results suggests that because of existing interdependence relation between government expenditure and revenue, the government makes its expenditures and revenues decision simultaneously. Under this hypothesis, the fiscal authorities of Iran should try to increase revenues and decrease expenditure simultaneously to control the budget deficits.