Causal Links between Tax Revenue, Government Expenditure, and Economic Growth in Nigeria

In this study, the causal effects of tax revenue, government expenditure, and economic growth are examined for Nigeria using monthly data from 1981 to 2020. The study used wavelets Granger causality econometrics approach to conduct the empirical analysis. Specifically, our findings from the wavelet decomposition and Wavelet Granger Causality show that a bi-directional causality exists between economic growth and government expenditure in the long run and very long run. In contrast, a unidirectional causality was discovered going from Real GDP to Tax revenue in the long run period. A unidirectional causality runs from tax revenue to government expenditure in the second half of the short run period, during the medium run period, and long run period. The findings of this study carry an important policy message, highlighting the need for caution regarding increased public sector involvement due to the uncertainty associated with oil prices, which currently account for approximately 80% of government revenue. To mitigate this risk, the government should focus on enhancing revenue streams by diversifying its economic activities into other sectors. This approach will help reduce the over-reliance on oil and create a more stable and sustainable financial foundation for the country. Also, the taxation policies to be implemented based on the economic conjuncture of Nigeria are a powerful financial tool, with the potential to serve the economic objectives to be achieved.