Public Revenue-Expenditure Nexus: A Test of Fiscal Synchronization Hypothesis in Nigeria

Abstract

Fiscal synchronization hypothesis which argues a bi-directional causality between public revenue and expenditure, is one of the four basic schools of thought on the nexus between public revenue and expenditure. The hypothesis is one of the mostly advocated and recommended for adoption for most countries most especially, developing economies. Hence, the thrust of this study was to test within the Granger causality framework, the validity of the fiscal synchronization hypothesis in Nigeria's states and Federal Capital Territory (FCT) for the period 1981 to 2020. Hence, study aims to determine if there is a long-run relationship between public revenue and expenditure and to also evaluate the applicability of fiscal synchronization hypothesis in Nigeria. Empirical findings of this study suggest the existence of a long-run relationship between government revenue and there was a two-way causal relationship between revenue and expenditure of the states and FCT in Nigeria in the period of study. Therefore, this study confirms the validity of fiscal synchronization hypothesis in Nigeria's states and federal capital territory. It therefore recommended that the state government and the FCT to always make their revenue and expenditure decisions simultaneously in order to contract the fiscal deficit gap in the country.