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Abstract:
The purpose of the study is to investigate the causal relationship between government revenue and expenditure in Odisha by applying ARDL bounds testing approach to cointegration and error correction model over the period 1981-82 to 2016-17. NSDP is added for a trivariate investigation to obviate variable omission bias. The results show that there is unidirectional causal relationship between government expenditure and revenue with the direction of causality running from revenue to spending in the long run. This result is consistent with the tax and spend hypothesis.Under this hypothesis, the most effective way of correcting fiscal imbalance is to increase revenue and cut spending. Hence, the fiscal authorities of Odisha should increase revenue and decrease expenditure to correct fiscal imbalance in the state.

Key words: Government Revenue, Government Expenditure, ARDL bounds testing, Granger Causality, Odisha

JEL Codes: C22, E62, H70

Acknowledgements: This is a revised version of the paper presented in the 56th Annual Conference of The Indian Econometric Society (TIES), held at Madurai Kamaraj University, Madurai from 8th to 10th January 2020. I am thankful to the participants for their useful comments. The views expressed in the paper are that of the author and not the institution he belongs.