The relationship between revenue and expenditure of government has attracted a lot of interest particularly with respect to budget deficits. The goal of this paper is to investigate evidence for causality between Punjab government receipts and expenditure within a trivariate framework by modeling them together with gross state domestic product (GSDP). The study uses the annual time series data. The data are analyzed to determine its stationary using Augmented Dickey Fuller (ADF) unit root test. The four schools of thoughts have been included in this paper on the basis of vast literature available about this relation. Our application of the Toda and Yamamoto (1995) test for Granger causality reveals support for the “institutional separation” hypothesis for Punjab state. On the other hand, there is a strong bidirectional causality relationship between total expenditure and GSDP of Punjab state. Similarly, the evidence of bidirectional causality relation between state government receipts and GSDP of Punjab is found.
Receipts, expenditure, government, Punjab, Toda-Yamamoto
