Turkish budget deficit sustainability and the revenue-expenditure nexus

Abstract

The sustainability of the Turkish budget deficits as well as the dynamics of government revenues and expenditures in controlling the size of the deficit is examined using annual data from 1968 to 2004. The findings support the existence of a long-run relation between government revenues and expenditures once allowance is made for an unknown structural break. However, the size of the slope parameter is significantly less than one, suggesting that the government might face difficulties in financing its future debt. With respect to the revenue-expenditure nexus, the empirical evidence is favourable to the tax-spend hypothesis through the error correction term in the expenditures equation. Finally, there is no evidence of asymmetries in the adjustment process in either the threshold autoregressive or momentum threshold autoregressive specifications of the budgetary adjustment process.