Tax-and-Spend Principle in Budget Management in Sri Lanka in the Post-reform Period

Abstract

The correlation between a government’s expenditure and revenue has attracted a lot of interest thanks to its policy relevance. This paper delves into the fiscal adjustment process through the expenditure and the revenue of Sri Lanka in the post-reform era from 1979 to 2009. The Augmented Dickey–Fuller study for the unit root testifies that both expenditure and revenue in Sri Lanka over the period have been I(0) stationary. The vector autoregression (VAR) model along with innovation accounting show that one-year lagged revenue leads to a rise in government expenditure in the next period. Revenue innovations also have a significant role in changing the expenditure profile. These findings uphold the tax-and-spend approach as the prevalent feature of the Sri Lankan economy’s fiscal system over the period of this study. Therefore, fiscal adjustments based on the revenue side of the budget need to be analysed.