The causal relationship between government revenue and expenditure in the determination of budget deficit in Sri Lanka

Abstract

Introduction

The total government revenue which heavily depends on tax revenue and the total expenditure as a percentage of GDP is continuously declining over the past few years in Sri Lanka. However, the budget deficit as a percentage of GDP has not been reduced commensurately and still remains high (CBSL, 2014). It shows that the failure of fiscal policy makers to understand the relationship between government expenditure and revenue, and to manage the budget deficit appropriately. Ravinthirakumaran (2012) suggested that the government decisions on revenue and expenditure are jointly made by the fiscal policy makers. However he asked that why the budget deficit remains high and it is not properly addressed. Another study by Kesavarajah (2012) found that various types of fiscal expenditures have different degree of impacts on economic growth. The author sheds some lights on the significant potential to improve growth efficiency of fiscal spending and thereby improve tax revenues. Although the relationship between government revenue and expenditure has been attracted by previous researchers attention has not been made adequately to explore the particular aspect referring in the determination of the budget deficit in Sri Lanka that focusing in this study.

Therefore this study attempts to examine the interrelationship between government revenue and expenditure drawing particular attention on the impact of some selected variables, such as expenditures for education, health, defense and unemployment as major components that basically causing the persistent budget deficit of Sri Lanka.