The relationship between fiscal variables and output empirical evidence in Singapore, Malaysia and Indonesia

Abstract

The fiscal policy design has become an important issue in Asian countries. In recent years, a number of papers have focused on the examination of causality patterns between fiscal variables and output. This paper attempts to analyze the relationship between fiscal variables, including government expenditure, revenue 3Dd ouwut in Singapore, Malaysia and Indonesia. We applied comiegratioo and Vector Error Correction Model (VECM) to analyze the relationship between government expenditure - revenue, and government expenditure and revenue on output. The result shows that, there are strongly long run relationship between fiscal variables and output in these three countries. A more active fiscal policy is recommended in Singapore and Malaysia; meanwhile a better fiscal management must be applied in Indonesia. Key words: Cointegration, Causality, ~rror Correction Model. INTRODUCTION In' recent years, fiscal policy has played an important role in supporting economic growt8h in Asian countries. Generally, fiscal policy covers government revenue and expenditure decisions in order to reach an optimum economic growth and to stabilize the economy in a whole. The main source of government revenue is tax. Government expenditure consists of operating expenditure and development expenditure. The impact of government sector to the economy is shown by the effect of government expenditure on the main various macroeconomic indicators. Generally, the Asian countries government applied deficit budget policy to manage the economy and to stabilize the price level. In fact, the deficit is going up higher in last five years. Expansive fiscal policy, that is the expenditure growth is higher than that of government revenue, tax in particular, would give positive impact on output. Theoretically, increasing in government deficit to its optimum level would support to the optimum economic growth. Further observation and research on the effects of government expenditure to the economy, both in short term period or long term, therefore, need to be conducted. This paper attempts to analyze the causal relationship between government expenditure and revenue and the effect. of government expenditure on output in Singapore, Malaysia and Indonesia. This article focuses on government expenditure, revenue and real gross domestic product. For these purposes we employ the dynamic models, such as co integration and error correction model (ECM), which are popular in the last ten years. In addition, pre tests of unit root and degree of integration are an important prerequisite to obtain a valid regression. LITERATURE REVIEW Several alternatives hypotheses of government finance have be~~ put forward to explain both the relationship between government expenditure and revenue, or government expenditure and output. Peacock and Wiseman (1979) support the spend-tax model. In other words, it means that increasing in government expenditure will leads revenue. The theories are IUpported by Anderson, et al, (1986), and also Von Furstenberg (1986). The tax - spend model was formulated by Friedman (1978). Several findings support this assumption; there are Manage and Marlow (1986), Ram (1988) and Blackely (1986). He suggests that expenditures Idjust to weather level can be supported by taxation. In other hand, Meltzer and Richard (1981)