Social Sciences in China (Chinese Edition)

No.2, 2016

The Relationship between Fiscal Revenue and Expenditure and Deficit Sustainability—Empirical Research Based on Threshold Asymmetry

(Abstract)

Yang Zihui, Zhao Yongliang and Wang Lin

The relationship between fiscal revenue and expenditure on the one hand and deficit sustainability on the other has long been a central issue for government macroeconomic adjustment. We carried out research on the asymmetric drive relation between government revenue and expenditure and long-term deficit sustainability using a number of nonlinear models including momentum-consistent threshold autoregressive, in combination with an examination of the asymmetric adjustment of government revenue and expenditure under conditions of fiscal improvement and deterioration. Our findings show that the self-correcting mechanism of government revenue and expenditure has made the deficit sustainable in the long term, but policy authorities only make the appropriate adjustments to revenue and expenditure in circumstances where the deficit is growing too rapidly. The functional relationship in which “expenditure drives revenue” is a longstanding feature in China, and deficit policy implementation could see a rise in the tax burden and the size of the national debt in the future. Even if the deficit does not rise above a 4.4% threshold, it is still necessary to have a firm grip on the macroeconomic adjustment of reasonable government expenditure and to establish an effective early warning mechanism.