A Reexamination of Budgetary Disequilibria

Abstract

Recent research has found that the time path of revenue and expenditure equations fails to respond to budgetary disequilibria but does adjust toward their long-run relationship to the gross national product. This result has been used to reject both the tax-and-spend and spend-and-tax models of the budgetary process. The purpose of this article is to reexamine the debate on the temporal relationships between federal government revenues and expenditures using quarterly U.S data over the 1955.1 to 1994 2 time frame. Using time-series techniques such as cointegration analysis and autoregressive conditionally heteroskedastic models, the authors find that, although revenue equations do respond to both budgetary and fiscal disequili bria, expenditure equations do not respond to either disequilibria individually. Thus, the time path of the expenditure equations are not affected by movements in the budget deficit or by the overall movements in the economy at large.